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Calculate your average revenue per employee to allow visability of employee unit cost and productivity of your business at an individual level.
|Revenue Per Employee||50000|
As the name suggests, revenue per employee is a ratio used to determine the revenue generated per individual in a certain company. It is a meaningful analytical tool because it measures the efficiency of a firm. Revenue per employee measures how well a company is utilizing its employees. As a rule of thumb, "the higher the level of revenue per employee, the greater the productivity". In other words a company with higher revenue per employee ratios are typically more profitable.
Let's take a look at the various factors that affect this ratio:
Comparison of revenue per employee from company to company majorly depends on labour demand because it varies from industry to industry. Generally, an industry with more labour demand generates more profit.
Banks for instance, require more human resource for running its operations and have a higher ratio of revenue per employee. On the other hand, requirement for human resources is quite high in other industries like agriculture and manufacturing companies as well, but revenue per employee is less compared to that of banks.
Established companies typically have a higher revenue per employee than that of comparable young firms. This is because new companies in the market need more employees to establish themselves and typically have start up costs which can distort first year accounting performance. Established companies on the other hand, are already generating more revenue with the same employee base and have typically achieved a sustained operational cost model so accounting ratios become more stable and dependable as a means of quantifying productivity.
New companies have a high ratio of "new employees" and new employees, however competent, need to learn the business processes, gel as a team and integrate into the company ethic, culture and understand the internal KPI's that drive success. This can be summed up as the "new employees learning curve", a period during which the comprehension of new tasks and optimal execution of said tasks requires time, during this time the employee is not efficient in productivity terms. As a direct result, the firm's revenue per employee ratio tends to run low so it is important to consider this metric when using revenue per employee as a benchmark, particularly during periods of new employment. The ratio will change gradually with increased worker which will in turn, lead to improved profitability and more dependable figures for benchmarking.
A company's employee turnover ratio is a major factor that affects revenue per employee. The employee turnover rato is the percentage of the employees who are dismissed or leave their jobs voluntarily. When this creates a staff shortfall (i.e., the staff reduction is not part of downsizing), the company will need to replace the old employees, which in turn requires candidate resourcing, CV review, interview(s), salary negotiation and onboarding. This all detracts from the core business transformation model as time is invested in non-transformative activity. In addition, once hired, the new employee will not be fully productive as we discussed earlier. In addition, more experienced staff members will likely be used as mentors so the impact is not simply measured as one employee.
A productive workforce drives business success, therefore, companies aim for a high ratio of revenue per employee. This approach is quite efficient on the surface, but comes with some limitations. Benchmarking is key to measuring success using this business performance ratio. While comparing revenue per employee ratios with other companies you must understand that the comparisons should only be made by the companies that are from the same industry. To give an instance, certain labour intensive industries such as; mining or food and beverage industries have very low revenue per employee when compared to industries related to technology. They also having differing ratios as the work environments are different. One coal mine for example is not the same as another, the environmental conditions, machinery efficiency and labour laws / union influence are a few elements that can distort a like for like comparison of the ratio.
Additionally, revenue per employee ratio should not be used as a standalone measure of employee profitability. It should always be used in conjunction with other financial ratios and also consider the human resource for what it is, human. Not all people can work to the same output, they face differing challenges and the business culture can really affect productivity. Far too many companies fail to comprehend that a happy workforce works harder, will go the extra mile and boost business productivity if they feel wanted, relevant, part of the team and appropriately compensated (financially, ethically, compassionately and fairly).
The revenue per employee calculator developed by iCalculator works on the following basic algorithm:
The following inputs are required to get the results:
Based on your inputs, the calculator will provide you with a total amount of revenue that is generated by each employee in the same period.
The revenue per employee calculator is an online tool that is at your disposal at all times.
Considering the factors discussed above, it can be concluded that the revenue per employee ratio reflects profitability but must not be considered in isolation. The age of a company, the strength of internal processes and the experience of its staff are just three simple yet important components. As we have discussed, the revenue per employee ratio is an indicator that underlines your need to focus on your workforce. The real value of human resources depends on training and shaping employees in a way that effectively increases the revenue per employee. Keeping in mind the limitations, a company may double its profitability in comparison to another company that belongs to the same industry with the same workforce, just by sensible investment in human capital.
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