When we think of bad hiring mistakes, we often zero in on specific hires such as the sales guy that couldn’t sell or the accountant with math issues, or even the customer service specialist with bad people skills. Those bad hires haunt us for years. Sometimes they even prevent us from wanting to make future hires as we come to believe that we cannot 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 might be when we don’t add a new employee when our current employees are overworked.
How do we know when to avoid either of these situations? Most often, we rely on a gut feeling. We see workers sitting idly at their desks and we assume we might be overstaffed. Or we see employees working crazy hours or pulling their hair out because of workload and we decide it’s time to add staff. Is there a better way of making these decisions?
The good news is there is. 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 annual revenue is $2 million.
$2 million/20 = $100,000. Your company is producing $100 thousand in sales per employee a year. Easy math.
Is that good? The average small business actually generates about $100,000 in revenue per employee. Larger companies are 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 your particular industry. 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 would look at it at least quarterly. It may fluctuate short term because of 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. Now it is easy to avoid making the worst hiring mistake possible.