What is Revenue Per Employee?
Revenue per employee measures the average revenue generated by each employee of a company.
How Does Revenue Per Employee Work?
Revenue per employee is calculated by dividing a firm's revenue by its total number of workers (Revenue/Number of Employees).
Let's take a closer look some sample figures from Company XYZ:
2005 Revenue: $50,000,000
By plugging the information provided above into the above formula, we can calculate the firm's revenue per employee as follows:
$50,000,000/312 = $160,256.41
Therefore, every employee at Company XYZ contributed approximately $160,256 in revenue for 2005.
Why Does Revenue Per Employee Matter?
Revenue per employee is a measure of how efficiently a particular company is utilizing its employees. In general, relatively high revenue per employee is a positive sign that suggests the company is finding ways to squeeze more sales (revenue) out of each of its workers.
Labor needs vary from industry to industry, and labor-intensive companies will typically have lower revenue per employee ratios than companies that require less labor. Hence, a comparison of revenue per employee is generally most meaningful among companies within the same industry, and the definition of a "high" or "low" ratio should be made with this in mind.
Additionally, a company's age can influence its revenue per employee ratio. Young companies may be in the process of escalating their hiring activity to fill key positions, yet their revenues may still be relatively small. Such firms tend to have lower revenue per employee ratios than more established companies that can leverage those same key positions over a larger revenue base.
In the case of Company XYZ, the $160,256 figure we calculated above is of little analytical value when examined by itself. The key is to see how this figure compares against historical readings: Are the firm's revenues per employee rising or falling? Investors should also see how well the ratio stacks up against industry peers.
Growing companies will inevitably need to take on additional help at some point. Ideally, though, management will be able to grow its revenues at a faster rate than its labor costs; this is often reflected in steadily rising revenue per employee figures. Ultimately, increased efficiency on this measure should lead to expanding margins and improved profitability.