When you have too few employees, you could earn more revenue by increasing your company's size and productivity, but when you have too many employees, you may not be making as much profit per employee as you could with a smaller staff. The revenue per employee ratio can help you figure out how much profit you are making per staff member, so you can determine if your payroll is being effectively utilized.
To calculate revenue per employee, just divide your annual revenue by your average total number of employees.
The profit per employee formula is a tool to help you figure out approximately how much money each employee generates for the company as a whole. Obviously, this is just an average as one exceptional salesperson may bring in twice what your typical salesperson brings in over the course of a year, and while customer service agents may help retain customers, they do not directly generate profit through sales.
Nevertheless, by looking at the average revenue generated by employees, you can learn a lot about how efficiently your company is utilizing your staff. If you notice your profit per employee is particularly low, for example, you may need to reduce the size of your workforce. On the other hand, if you are a growing company and have started making a big hiring boost, this can help you track whether or not your staff expansion translates to increased profits as time goes on.
It's important to recognize that what is a good profit per employee ratio for one company will not be good for another, especially when comparing two companies from different industries. For example, labor-intensive companies like construction firms are by their very nature going to have much lower revenue per employee ratios than a company that doesn't need as many employees to operate, such as those in the tech sector. That is why you should only compare your business to similar companies in the same industry. After all, it would hardly be fair for a local construction company to compare their profit per employee to that of eBay.
It's also important to consider a company's age and growth stages. If your company is young and/or growing, then you most likely won't have anywhere near the same revenue to employee ratios as that of an established company in the same field. In the end, though, you can hope your revenue to labor ratios will grow to meet or exceed those of similar established companies.
You can also use this data to compare your current revenue per employee ratio to your past ratios to see that you are using your staff with increasing efficiency as time goes on. If you hire a lot of new employees, for example, you'll probably want to keep an eye on this ratio to see that it eventually meets or exceeds your profit per employee ratio from before you increased your staff size.
Stated simply, the sales per employee formula involves dividing your total annual revenue by the average number of employees for that period, in other words, revenue/average number of employees. For example, imagine a company has a yearly revenue of $5 million and has an average of 100 employees for that year. To perform the revenue per employee calculation, divide the revenue, $5,000,000, by the number of employees, 100. In this case, you would find the revenue per employee formula gives you a ratio of $50,000 per employee.