Calculate Revenue Per Employee To Increase Productivity And Cash Flow

by Doug Smith, President, The Woodhaven Group

If your company is increasing productivity then chances are the cash flow  of your business is also improving.

That is a good thing.

But how do you know if the productivity of your business is showing improvement?

Is there a quick easy way for an owner or CEO to know if the efforts to improve productivity compared to other businesses is working?

Yes there is.  One quick metric that will give the owner a snapshot is Revenue per Employee.  It is simply total revenue or sales divided by the number of employees.  If your company can increase sales while staying at the same employee level then it tells you that  the combined efforts of all employees is having a positive impact on sales growth and probably on cash flow.

Industries differ in the Revenue per Employee calculation that is reported.  Software companies and oil companies can have a high Revenue per Employee while retailers may show a smaller Revenue per Employee.  J. Bryan Scott showed an interesting table right here of 100 companies and their Revenue per Employee totals.

For the owner, it is critical that you define what an employee is.  I have always liked to use full-time equivalents (FTE).  For example, 2 part-time 20 hour employees equal 1 full-time 40 hour employee.  I would define how many hours is a FTE and divide that into total hours  worked.  That is my number of employees.  I take the sales total and divide by the number of employees to get my Revenue per Employee.  Retailers are often a good example of why FTE needs to be used.  Some retailers choose to employ primarily part-time employees while others choose to employ primarily full-time.  Wal Mart probably has a low Revenue per Employee number if they don’t calculate using FTE.

The other caveat is to recognize when comparing to other companies that they may have a high percentage of their work done by outside contractors who are not employees.  As a result, the company will appear very productive because there would be a high Revenue per Employee reported.  I would imagine Microsoft and oil companies like BP or Shell that use a lot of outside contractors will have high Revenue per Employee calculations.  

When it is all said and done, the truest measurement of productivity using Revenue per Employee is to track the trend in your own company.  Is Revenue per Employee going up or down?  Take the best year of sales and profitability in the history of your company and use that year’s Revenue per Employee calculation as a baseline to compare to.  If I had a bad 2nd quarter, I would want to compare the Revenue per Employee back against that baseline year.  Then I would take action to get to my baseline for the next quarter.

If you have an industry association where everyone computes Revenue per Employee the same way, then that becomes a great way to measure how productive your company is.

As an annual goal for my company, I would always challenge my management team with an aggressive improvement in Revenue per Employee.  I know that if I hit the goal then I probably had a great year from a sales, profit and cash flow standpoint.

I would be interested to know if your company has had success using Revenue per Employee as a productivity calculation.

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