Examples of Ratio Analysis in Human Resource Management

Determining future human resources needs is one of the main functions of HR management. Getting it right means not only forecasting the number of employees the business will need but also when and at what cost. Ratio analysis is both a process HRM goes through in forecasting demand, timing and cost and the metric HRM uses to forecast demand. Each of the metrics used in ratio analysis are quantitative assessments that in total provide more precise estimations than forecasting by relying on historical trends.

Ratio analysis uses historic information to project future staffing needs. The ratio establishes a relationship between the number of employees needed and another factor such as past staffing levels or past gross sales revenues. Assume HR is forecasting demand for the clothing department of a retail department store. Gross sales revenues for the past year were $75,000 and the clothing department currently employs five full-time employees; the ratio is 75,000:5 or 15,000:1. This means that for every $15,000 in gross sales, the department needs one employee. If sales are expected to rise by $30,000 in the coming year, the department will need to hire two full-time employees.

The time it takes to fill a vacancy can help HR decide on when, where and how to post an open position. If the open position is an unexpected vacancy, this metric can also help department managers create interim employee work schedules. Time-to-fill uses historical information to calculate an average time-to-fill estimation. Start by adding up the total number of calendar days that all vacant positions were open for the previous calendar year. Divide this number by the number of vacancies filled during this period to get an average time-to-fill. If total vacancy days during the previous year come to 250 and during this time you hired 10 new employees, it takes an average of 25 days to fill a job.

HRM forecasting also includes predicting the costs the business will incur during the process of hiring new employees. If cost becomes a concern, HR can, for example, cut costs by hiring directly instead of using a staffing agency. To calculate cost per hire, add up total hiring costs for the previous year, multiply this number by 1.1 and divide the total by the number of employees hired during this period. If hiring costs for the previous year were $1,000 and the business hired 10 new employees, it cost the business $110 per new employee.

Turnover rate can help HR and department managers create “best guess” estimates on the number of replacements the business may need to hire. Turnover includes vacancies that result from both voluntary and involuntary departures and terminations over the previous calendar year. Calculate the turnover rate by dividing the total number of terminations by the average number of employees in place during the year. If 25 employees left the business last year and for the year the business averaged 250 employees, the turnover rate is 10 percent. If ratio analysis determines the business needs to maintain a total of 260 employees, HR can plan on filling 10 new positions and 25 termination vacancies over the next year.