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How to Calculate Revenue Per Employee (and Why It Matters)

What is revenue per employee, and is it a metric you should use? Fully understanding the financial health of your company can help you make strategic decisions going forward. Find out more about the revenue per employee calculation and how you can use it.

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What is revenue per employee?

Revenue per employee estimates how much revenue each staff member contributes to your company. A higher revenue per employee can mean that each team member averages a greater contribution to your company’srevenue, which can help you determine how efficient and productive your team is. Lower numbers in this area could show inefficiency in how your staff is working, or it could signal other business challenges such as high overhead costs, inefficient resource allocation, pricing products/services too low and more

Why is revenue per employee helpful?

You may use a variety of financial metrics to gauge the health of your business. Despite being a relatively simple calculation, revenue per employee (RPE) can give you valuable insight into how things are going. Calculating it can help you with the following:

  • Workforce efficiency: Higher numbers can mean that your employees are working efficiently. When you’re optimizing your talent, you get higher productivity levels from them, which could help generate more revenue.

  • Comparison to competitors: If you can access RPE numbers from your competitors, you can see how you stack up. This can help you determine if you’re competitive or have room for growth compared to others in your industry.

  • ROI for labor costs: Your labor costs can be one of your biggest expenses, so you want to ensure they’re worth it. Having a high RPEcan show that your investment in your employees is giving you a good return.

  • Historical tracking: Regularly tracking your revenue per employee can help you look for trends and see if you’re steadily improving your numbers. It’s one way to track your progress.

  • Decision-making: You can use this financial metric to help make staffing and business operations decisions. It can be one of several data points that help inform decisions.

  • Workforce planning: Your RPE relates directly to the number of team members you have. You can more effectively plan for changes to your workforce when you have data on your current revenue per employee.

The revenue per employee formula

The revenue per employee formula is simple. It’s your total revenue divided by the number of employees on your payroll. It typically uses the revenue numbers from the last 12 months, but you can adjust your calculation periods. For instance, you might calculate it every quarter. The results after dividing give you the average amount each team member generates.

Say your company generates $750,000 in revenue and has 15 full-time employees. Divide $750,000 by 15 to get $50,000 per employee. Thisis your RPE.

Factors that impact RPE

Every business is different, so there’s no standard ideal RPE that you should aim for. A higher RPE is generally better, but several factors could impact your numbers. Some of those things include:

  • Your industry: The nature of your business can impact your RPE. Labor-intensive sectors or business models typically have a lower RPE because they need more staff to keep things running.

  • Time in business: Younger businesses often haven’t ramped up their revenue as much as competitors doing business for decades. It takes time to grow your company and create a balance between your labor and revenue. TrackingRPE can help you see if you’re improving as the company grows..

  • Growth and change: Even with an established business, you could go through periods with lower RPE numbers if you’re experiencing growth or making major changes. Say you decide to branch out into a new product or service. You might need to add several employees to get the new project running before it generates any revenue. The increased headcount will lower your RPE for that period until you see the revenue flow from that project.

  • Pricing model: Setting prices for your products or services is an important factor in RPE. If you’re undercharging for what you offer, it could negatively impact your RPE.

  • Turnover: Your employee turnover rate can affect your RPE in different ways. High turnover could mean your workforce is generally unhappy, which can lower your RPE. Your organization may also have more expenses with high turnover to cover hiring and training costs, which could affect your financial health. Plus, hiring new employees frequently can lower productivity since it takes time for them to ramp up.

How to improve revenue per employee

Working toward an improved revenue per employee ratio can benefit any organization, even if your numbers already look good. Improving the rate means you’re increasing efficiency and productivity. If your RPE numbers are lower, you might focus on improving them even more. The two main ways to improve RPE are to reduce your headcount or improve productivity. You can achieve one or both of those with these methods:

  • Streamline your processes: Boosting productivity can help retain your staff and improve your numbers. Look for inefficient processes or redundant activities you can eliminate to make your staff more productive. Get feedback from your team to see what would make their jobs easier and more efficient. Automation, improved technology and process changes can help.

  • Review your headcount: Before adding new positions, ensure they’re necessary and consider alternatives such as seasonal employees or contract workers.

  • Build a strong management team: Leadership often impacts efficiency and productivity. Strong leaders know how to get the best out of their employees and provide the support the team needs to do their job well. Hire new managers with care and develop strong leadership skills in your current management team.

  • Optimize your talent: Your team members should be in positions that align with their skills and talents. Shifting duties or roles could help improve your efficiency. You can also optimize talent by offering training and development opportunities to improve the skills of your current staff.

  • Improve employee retention: Improved retention rates can keep your productivity higher. Better hiring practices, competitive compensation and an improved work environment can help with retention.

  • Create a positive work environment: A positive, supportive workplace makes your employees happier, producing higher quality work and potentially increasing productivity. Listening to feedback from your staff can help you make little changes that improve the employee experience.

  • Consider pricing changes: You might improve your RPE if you bump up your prices while remaining competitive. Increasing your prices too much could cause you to lose business, but if you’re currently undercharging, this could be an effective strategy.

FAQs about revenue per employee

How important is revenue per employee?

Revenue per employee can be an essential metric to help you make positive changes to your organization. A low ratio could be an indication of inefficiencies. Tracking revenue per employee can also help you track changes, so it can indicate if your strategies are effective. However, it’s usually more effective if you compare it to historical data or use it in conjunction with other financial data to get a well-rounded picture of your financial health.

What is the difference between revenue per employee and profit per employee?

These two metrics are similar, but they use different financial numbers. Profit per employee looks only at the profit amount, which is the net business income after factoring in expenses. Revenue per employee looks at all money coming into the organization before you subtract your expenses. You could see major differences due to expenses. Some industries have slim profit margins or high labor costs, for instance.

What can cause a low revenue per employee?

If your numbers are low, it could mean that your productivity is low, you have high overhead costs, there’s market saturation in your area or there are other economic factors at play. You might have too many employees for your workload or output. A high turnover rate can also lower your RPE. If you feel like your numbers are too low, dig deeper to figure out why you’re not generating more income compared to the number of employees you have.

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