Human resources forecasting methods focus on both the demand and supply side of identifying future staffing needs. A ratio analysis is a dual-purpose, demand-side forecasting method used to forecast demand and to compare forecasting results against industry standards or business competition. One big advantage of a ratio analysis is that it can be just as easily used in businesses that don’t have years of historic data to rely on for making future staffing predictions as it can in existing businesses.

Ratio Analysis 101

In a general sense, ratios establish a relationship between two similar things. Where human resources are concerned, ratios establish a relationship between a factor such as past staffing levels or future sales revenue predictions and employee staffing requirements. The factor setting the comparison standard is the first number in the ratio, and the staffing requirement is the second number. For example, a ratio of 20:1 based on sales revenues can mean that for every $20,000 in sales revenues, HR estimates the department will need one full-time employee. If sales revenue predictions for the coming year are set at $200,000 the department will need to maintain a staff equivalent to 10 full-time employees.

Historic Data vs. Future Predictions

Historic data allows HR to make custom staffing estimations. New businesses without historic data can just as easily calculate ratios for analysis using industry standards or information they gather from observing the competition. Although using historic data can increase the accuracy of some ratio calculations, even businesses that have years of historic data sometimes opt for using future predictions. For example, sales revenue forecasts are commonly used in ratio analysis calculations. Future predictions can also align with strategic business or HR objectives. If HR embarks on an employee engagement program it expects to result in a reduction of turnover rates by 20 percent, it can use this estimate rather than historic data in making turnover-related staffing estimates.

How HR Uses a Ratio Analysis

A benefit to a ratio analysis is that HR can use a basic ratio calculation to estimate staffing demand in a number of different ways. Some of the most common include employee turnover ratios, time to fill jobs and cost-per-hire ratios. Turnover ratios allow HR to modify initial workforce demand estimates based on the number of replacement employees the business may need to hire throughout the coming year. Time to fill jobs helps HR set a time frame for the hiring process and make decisions on when, where and how to post open positions. Cost-per-hire ratios help in HR budget planning.

Calculating Ratios

Ratio calculation equations differ according the ratio being calculated. Calculate turnover ratios by dividing the total number of terminations for the previous year or an estimated turnover number by the average number of employees in place during the year. Calculate the time it takes to fill jobs by finding the total for all the days vacant positions were open during the previous calendar year and then divide this number by the number of positions filled during the period. Calculate cost-per-hire by adding up total hiring costs or cost estimations for the previous year, multiply this number by 1.10 and divide the total by the number of employees hired during this period.