A company’s revenue is directly affected by the amount of compensation it pays its employees or labor force. Measuring the relationship between revenue and compensation figures in an accounting period using a financial analysis tool known as revenue-to-compensation or labor-to-revenue ratio can help you monitor how well your business is utilizing its human resources to generate sales. Using this tool can help you optimize overall profitability. Lack of knowledge about it can land your business in the red.


Revenue is the term used to refer to goods and services sold to customers. It is commonly used by financial analysts as a common denominator for computing various financial analysis ratios, because it represents the total volume of business transactions during a given accounting period. To get a more accurate ratio, use net sales, because it excludes sales returns and discounts. Derive the values used in computing labor-to-revenue ratios from your company's balance sheet at the end of each accounting period, which can be monthly, quarterly or yearly.


Labor is the term commonly used to refer to people who work for a business. In accounting, the term would not only include wages paid to workers but also life insurance, medical insurance, workers' compensation insurance, pension contributions, taxes on those wages and other benefits paid by the business. There are two classifications of labor – direct and indirect. Direct labor costs are those paid to employees directly involved in the manufacturing of goods or rendering of services to customers, such as factory assembly line workers. Indirect labor costs are payments made to workers not directly involved in producing goods or providing services, such as a janitors.


Labor-to-revenue ratio shows how much a company spends on its employees to generate net sales. Compute the figure by dividing labor cost by net sales for a given accounting period. The product of this formula is expressed in a decimal number, but multiplying the result by 100 converts it to percentage. For example, a company that paid $100,000 on payroll for a given month to generate $1 million in net sales will have a ratio of 0.10, or 10 percent.


The efficiency of a labor force increases as the labor-to-revenue ratio decreases, which is why a lower ratio is better for a business. The ratio by itself does not give you much information, but comparing the ratio against industry averages can give you an idea as to how well or how bad you are doing compared to similar businesses within an industry. Comparing the ratio against a company’s historical records can show if the labor force efficiency is deteriorating, improving or being maintained at the same level over a period of time.