How to Calculate Productivity in Sales Revenue and Labor Expense
When you hire an employee, she must produce enough income to cover her wages with enough left over to pay expenses and make a profit. It's easy to assume that money you spend on labor is creating results, but you can't be sure until you actually measure productivity in terms of sales dollars. This is not a complicated process. With a few basic figures, you can keep track of whether wages turn into profits.
Start with your payroll figure for the group of employees you are studying. The total wages for a given period can serve as a foundation for figuring labor costs. Add the cost of benefits to get your total labor expense. By adding wages and benefits together, you get a much clearer understanding of what you spend on labor and give yourself the opportunity to measure the true value of employee productivity.
You measure output by adding up the dollar value of the goods and services your employees produce. The time period for measuring output must match the time period for measuring wages. For example, if you look at what you paid in wages for a month, look at the output for that same month. Note that this output is not a sales figure. It is the value of what was created. Your production employees may have completed products that would bring you $10,000 if you sold all of them, to use as an example. Similarly, services should be valued according to what they are worth, not whether you have collected on all invoices.
Divide the value of the output by the cost of labor. For example, if you received $10,000 worth of goods and services and paid $7,000 for labor, divide 10,000 by 7,000 to get 1.42. That means for every dollar you put into labor, you potentially make $1.42 in sales revenue. As long as this figure remains above one, you are making money on your labor dollars.
What you actually receive in sales revenues may not match your output figure. Some products may not have sold, or you may not be able to collect on all of your service invoices. Measure your actual collections against your output figure. Divide actual revenues by your labor cost to find your productivity figure. To use the example from above, if actual collections were $9,000, divide 9,000 by 7,000 and you see that your productivity figure becomes 1.28 instead of the original 1.42 you got from measuring output. The problem you must address in this case is where the revenues are going. You could have a collections problem instead of a productivity problem, or your sales department may not be as effective as you want. If this is the case, you don't need to improve production, you need to improve sales.