Get a better picture of the financial health of your company by determining your revenue per employee.
Before making any strategic decisions in an organization, it’s important to know the numbers that reflect the true state of things.
One of the metrics that can give you vital insights into the financial health of your company is revenue per employee. It's very helpful for analyzing and planning your workforce, as it lets you see a broader picture of how your team is operating.
Revenue per employee (RPE) is a financial metric used to describe the amount of revenue generated by each full-time employee. It’s an equation where you take the overall revenue a business earns over some period of time (usually 12 months) and divide that by the number of employees.
RPE is an important HR KPI that helps evaluate employees' productivity and the profitability of the organization, as compared to other organizations within the same industry. The information it provides can be helpful in wider project financial management and for improving cost-efficiency.
There are several reasons why businesses should take their RPE seriously:
By analyzing your RPE, you can understand if your staffing levels (the number of employees in your company) are optimal – and if not, make adjustments.
If you see that, over time, the number of employees stays the same but the RPE increases, you can conclude that your team is working efficiently.
And vice versa, if RPE is dropping but the number of employees is increasing, it can signal that you’ve got too many employees on the team, or that they are not being used efficiently.
For example, the root of this problem can be underutilization – a situation when resources are not used to their full capacity because of poor resource allocation. On the ground, this might look like employees experiencing too much bench time between projects, or having inconsistent workloads.
In any case, understanding the RPE lets you scan the financial situation of your business in terms of how you use your human resources, letting you build a robust staffing model and see how to improve your cost control.
With that being said, you have to analyze this metric in the context of your organization, taking into account factors like team size and organizational maturity.
For example, if you’re a start-up whose team members just started working on their projects, your RPE will be low, perhaps even negative, but it doesn’t mean you’re in trouble – you just need time to put things on rails.
At the same time, even though a spike in RPE is generally a good sign, it's not necessarily a good sign if it's occurring alongside high employee turnover, since it’s costly to hire and train new employees.
While RPE will not show you how much each employee contributes to your business, it's still a way to measure the value talent adds to the organization.
Lower RPE can mean that team members are not showing good results. While it won’t show you who specifically needs to improve, it will still give you an idea about the overall team performance.
However, this metric can be used to compare the performance of different teams within the same organization and to gain insights into the work of different departments.
By comparing your RPEs with RPEs of similar organizations, you can get valuable information about the productivity of your own workforce and the efficiency of your operations.
By applying this metric, you can see whether your labor costs are justified – and labor costs directly affect operational efficiency, as we know from the operational efficiency ratio formula. You may realize you need to have fewer employees on the team, or, on the contrary, hire more talented employees to keep up with the competitors.
There is no universal RPE that would work for every organization. According to CFO magazine, annual revenue per employee is $561,152 among organizations considered to be best performers, while bottom performers generate $171,131 per employee, and median organizations - $306,849 per employee each year.
However, these figures are very relative. The RPE metric largely depends on factors like size and maturity of the business, and, what’s even more important, on the industry. The RPE in a software company will differ from the RPE in a manufacturing one.
That is why your perfect RPE will depend on your competitors. Only by doing research and analyzing the average revenue per employee within the industry, can you understand your own current position.
To calculate revenue per employee, you use the following formula:
For example, if your company made $1,000,000 in revenue over the last year, and you’ve got 20 employees, your equation would look like this:
1,000,000 / 20 = 50,000
Based on this formula, you can predict a change in RPE:
The RPE formula is pretty basic, quick and easy to use, and it can give you some rough-and-ready insights into the financial health of your company.
However, it’s a bit of a blunt tool. It's not very helpful for understanding the whole picture – for example, which specific roles bring in the most revenue. To make strategic decisions, you'll need more information about where the money is coming from.
To get more granular around the numbers, you can use tools to help you understand what the revenue per role looks like.
For example, by using resource management software like Runn, you can find important KPIs for individual employees and for teams, grouped by weeks, months, or quarters. This visibility makes it easy to set revenue goals for particular roles and teams - and to keep track to see if they are hitting those goals.
