When we think of bad hiring mistakes, we often zero-in on specific hires such as the sales guy who couldn’t sell or the accountant with math issues or even the customer service specialist with bad people skills. Those bad hires always tend to haunt us. Sometimes, they even prevent us from wanting to make future hires as we come to believe that we are unable to make good hiring choices, no matter what.
My experience is that there may even be a worse mistake than a bad hire. That is when we make a hire when we don’t need to add a full-time employee. Or even worse, when we don’t add headcount when our current employees are badly overworked.
How do we know when to avoid either one of these situations? Most often, we rely on a gut feeling. We see workers sitting idly at their desks, and we assume that we might be overstaffed. Or, we see employees working crazy hours and pulling their hair out due to too much work, and we decide it’s time to add staff. Is there a better way of making these decisions?
Good news… there is, and it’s simple math. The calculation is revenue per employee. This may be the best and simplest measurement of employee productivity. Here’s an example:
You have 20 full-time employees (FTEs). Your 12 month revenue is $2 million.
$2 million/20 = $100,000. Your company is producing $100,000 in sales per employee. Easy math.
Is that good? The average small business actually generates about $100,000 in revenue per employee. For larger companies, it’s usually closer to $200,000. Fortune 500 companies average $300,000 per employee. Oil companies generate over $2,000,000 in revenue per employee. We should all own oil companies…
Using revenue per employee as a staffing tool takes three steps:
Step #1. Do the research. Find out what an optimal number is for your company based on the size of your company and the industry you are in. There are a variety of resources available to find this data including Hoovers, RMA,, and your local Small Business Development Center (SBDC) office.
Step #2. Set a range for your company. Let’s say you do your homework and determine that a good revenue per employee number for your business is $150,000. You then may set a performance range that determines when you might have to either add staff or downsize. That range might be $125,000 – $175,000. If your ratio goes under $125,000, you may need to look at reducing headcount. If the number goes above $175,000, it may be time to add staff. The key is that you are now managing to a number and not just a gut feeling.
Step #3. Manage the number. I recommend looking at your number at least every quarter. It may fluctuate short term due to seasonality, but if you see a three-month trend, it’s time to act. It’s also important to be looking for ways to increase the ratio. How can you improve the productivity of your employees? Better hiring? More effective uses of technology? Leveraging efficiencies?
The “great” companies operate at 2 – 3x their industry peers average revenue per employee. What can you do to improve your number?
Revenue per employee is one of my favorite small business key performance indicators. Easy to calculate. Easy to communicate to key stakeholders. Easy to avoid terrible hiring mistakes.