Much has been written about the stages of growth a company passes through. It’s easy to understand that when a company is very small and the owner is acting as salesperson, estimator, and production worker, overhead is very small and many contractors just starting will underprice their work due to lack of experience, timidity, pressure from “what the market will bear,” and a lack of understanding of their own costs.
But once the company starts to grow and more employees are added (both in the office and in the field), it becomes more difficult to judge whether or not the new hires will be able to produce sufficient work to justify the additional costs.
This is where a simple ratio can be useful: revenue per employee. Choose a period of at least six months where the company was most profitable. Then divide the revenue for that period by the total number of production workers. Note the figures. Then perform the same exercise for the most recent six-month period. Are the numbers larger, smaller, or about the same? If using a six-month period, be sure to double the numbers to determine an annual revenue per employee goal.
If your crew used to be able to produce $250,000/production employee two years ago, and now they’re only producing $200,000/employee, then do you have too many workers to be maximally efficient? Or perhaps this is a temporary situation because you have made some new hires but haven’t yet sold sufficient extra work to take advantage of the stronger workforce. If the numbers are reversed, then is it due to fewer workers, the employment of more efficient production techniques, or some other factor?
|Year 1||Year 2||Year 3||Year 4|
What does the data above reveal? By the way, if companies checking their ratios in 2008 found results such as shown in Year 2 below, many of them might have laid off workers sooner than they did! And using the same example below, Years 3 and 4 show that the increase in the labor force was not justified by the revenue.
Of course, it’s important to note that there must be a cap on what workers can produce. Trying to maximize volume per employee by whittling the workforce down to the absolute minimum can result in justifiable discontent and a higher risk of accidents and call-backs. The key is to identify the highest possible realistic and reasonable return on your labor investment.
The greatest value of this metric is the ease of calculation and predictive nature of the number. Even if your books are not in the best shape, you most likely know your total revenue and employee count. Use this metric to set your staffing needs as you project your revenue throughout the year.