If Your Business Has Employees, You Must Know This Ratio
Business owners are responsible for securing enough customer contracts to keep their employees busy and cover the wages through sales.
When entrepreneurs decide to hire more staff, it's a clear sign that their business is striving. It's also a clear sign that the workload has increased so much that they need more employees to handle it. Both are good problems to have as they demonstrate a company's success.
Hiring employees adds wages to a business's overhead expenses and permanently increases them by that amount. In that sense, wages are fixed costs that do not change whether an organization has a lot of customer contracts and its staff is busy or only a few and its employees have little to do. Still, employees receive the same pay unless the wage is hourly, compensating the employee only for the time worked for the company.
But don't believe you can dial up and down your employees' hours depending on the work you need to get done. That is rarely feasible since hourly employees often work for more than one employer. To accommodate your change in workload, they would have to constantly change their schedule with the other firm, increasing and decreasing their hours. That's simply not doable, and wages are, in most cases, fixed costs.
Consequently, business owners are responsible for securing enough customer contracts to keep their employees busy and cover the wages through sales. That makes it critical that companies with employees know how much sales they must bring in and how much gross profit their products must make to cover their staff's costs.
Fortunately, the metrics of sales per employee and gross profit per employee provide this information.
Sales Per Employee
Because of their emphasis on labor, service businesses often use sales per employee as their principal metric and set a minimum.
Depending on the minimum level, an amount above this level would indicate that the company's return is better than expected; an amount below this threshold would mean the return is less than expected, possibly even leading to a loss if sales are insufficient to cover the average wage.
Gross Profit Per Employee
Product businesses focus less on sales than on their products' gross profit, which determines the level of overhead expenses, including wages, a company can afford based on its profitability goals. Therefore, product businesses often use gross profit per employee as their leading metric.
If your business has employees, you should consider the metrics sales per employee (service business) or gross profit per employee (product business) when making hiring decisions. But don't forget to include yourself as an employee. You have to earn money too.
