Calculating How Much Your Company Needs to Earn to Support Each Employee

A key calculator for small companies is the Total
Revenue/Employee ratio. This is calculated by dividing
your company’s total revenue by the number of employees
in your company (owners included, assuming that they
earn salaries). You can obtain interesting and valuable
information from this ratio.

by Jeffrey Moses

Say your company has a gross annual total revenue of
$1.5 million. If you have 10 employees, yourself
included, your company has total revenue of $150,000
per employee. If you have been profitable at this ratio
for some time, you can roughly determine that you’ll
need an additional $150,000 in revenue before you can
comfortably add another employee. If you add employees
before that additional amount has been generated, you
may sacrifice profitability.

Additionally, you can roughly calculate how much an
additional employee should be expected to generate for
the company, if the company is to remain at the same
level of profitability. Using the ratio as outlined
above, you could hire a new employee when you feel it
likely that your hire would be able to generate about
$150,000 in total new sales. This takes some of the
guesswork out of hiring.

Continuing with the above example, if your average
employee is paid $40,000, you have remaining
$150,000-$40,000=$110,000 per employee for other
operational expenses, such as production, purchasing,
marketing, ongoing bills or debt service. This figure
($110,000) is the average revenue generated by each
employee. The more money per employee you have for
expenses other than salary, the more the average
employee is generating in income. By reviewing this
figure regularly, you can determine if your employees
are remaining at the same level of financial
effectiveness. Successful companies continually strive
to increase the average level of employee financial
effectiveness — this is the only way to remain
competitive for the long run.

The average employee salary in service companies may be
nearly as much as the Total Revenue/Employee ratio,
because the majority of revenue is spent on salary. For
example, an advertising agency with total revenue of
$1.50 million may spend nearly $1.0 million in
salaries, because the company’s "product" is the
creativity of its employees. A company that assembles
metal furniture, on the other hand, will spend a higher
percentage of its total revenue on materials, less on
the creativity of its employees. This means that the
average employee salary will be a lower percentage of
the Total Revenue/Employee ratio.

Whatever your industry or type of company, the average
revenue generated by each employee should remain
constant or rise over time. As a company grows and adds
employees, total profitability can increase even as the
average revenue generated by each employee falls. But
maintaining the level of revenue generated will
strengthen the underlying fundamentals of a company and
increase the likelihood of profitability in the future.

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