Employee turnover is a term used to define the rate at which employees leave an organization and are replaced by new workers. Turnover can be costly to small businesses, in both financial and intangible ways. Because of this, it is important to measure employee turnover and analyze metrics over time. Two insightful measurements of turnover include the average length of employment and the ratio of new hires to your total workforce. In addition to measuring the rate of employee turnover, understanding what employee turnover is costing your business in financial terms can provide deeper insight into the immediate impacts.

Importance of Measuring Turnover

The ability to measure turnover can give a small-business owner the information needed to reduce its negative effects, while determining what can be done to address the underlying causes. The ability to analyze the impacts on finances, productivity, efficiency and your brand image over time will allow you to develop strategies to mitigate these costs, while potentially providing clues as to the reasons behind the numbers.

Average Length of Employment

Measure the average length of time that employees remain with your company to spot long-term trends. If a large percentage of your employees stay for years, the average turnover will be skewed towards longer lengths. The opposite holds true, as well; if a larger number of employees leave the company within weeks or months, the number will be skewed towards the shorter lengths.

To calculate the average, add the total lengths of time each employee has been with your company. Divide the sum by the number of employees used in the calculation. Consider how long your business has been open when analyzing the result. Newer companies will naturally have shorter average lengths of employment, while more established companies should see longer average lengths.

New Hires Compared to Total Workforce

Calculate the ratio of new hires to your total number of employees at a specific point in time to get a clearer picture of how much of your workforce is made up of newcomers. A higher ratio of new employees can be a sign that your turnover is unusually high, unless you have recently expanded your workforce.

To calculate this ratio, divide the number of new hires currently employed by the current total number of employees. The result is the percentage of new hires compared to the total workforce (including the new employees).

Measuring the Cost of Turnover

Hiring and training new employees incurs direct and indirect costs. Your cost-per-hire includes the costs of advertising available positions, performing background checks, paying out referral bonuses and other costs incurred simply to inform jobseekers of your available positions. Internal costs include management's time spent reviewing resumes, making calls and conducting interviews, as well as the time spent by dedicated recruiting staff and the HR department. Transitionary costs can include paying temporary workers and the opportunity costs associated with lost productivity. Add to this the costs of training new employees once they arrive, and you will get a picture of just how much it costs to lose and replace an employee.