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In labour intensive businesses (i.e. where human capital is more important for generating revenue as opposed to physical assets) it can be difficult to determine your selling capacity. Have you been in the situation where employees are asking for more human resources yet you aren’t making enough money to cover additional wages? How do you calculate the earning capacity of an employee and what can you expect your turnover to be? These questions are all relevant in building your budget.
Below is a worked example to calculate an employee’s earning capacity:
Annual Salary $50,000
Total Annual Salary $54,750
Client facing/chargeable target 75%
Number of working weeks in year 45 weeks (We have used 52 weeks less 4 weeks annual leave less 3 weeks public holidays and personal leave)
Hours available per week 38 hours
Total annual hours available 38 hours * 45 weeks = 1,710 hours p.a.
Charge out rate $130 per hour
Projected fees/income generated by employee 1,710 hours x $130 per hour * 75% = $166,725
Based on the above example (excluding payroll tax and workers compensation insurance), the employee’s base salary is $54,750. The potential fees generated by the employee are $166,725. Using the rule of thumb in a labour intensive business – 1/3 wages, 1/3 overheads and 1/3 profit, then the employee’s salary and charge out rate appear reasonable.
$166,725/3 = $55,575
You can apply this formula to all employees to work out the earning capacity of your business. Download our excel template here FREE TEMPLATE DOWNLOAD
What is measured is managed
Now that you have calculated earning capacity by employee, it is important to monitor actual data and compare this to budget. Your businesses ability to generate income is directly linked to your employees’ chargeability. To measure an employee’s chargeability, they need to keep timesheets. Keeping timesheets doesn’t have to be onerous or complicated. Xero offers a basic timesheet which can be completed by your employees (and makes payroll processing more efficient). If you are a business where your employees provide services to the public, e.g. physiotherapist, speech pathologist, occupational therapist etc, you should be able to extract data from the booking system to calculate direct time spent with patients/clients and fees charged for this time.
Revenue per Employee
Revenue per employee (also known as sales per employee)
This ratio measures the average revenue generated by each employee.
Revenue per employee = Net Revenue / Average Number of Employees
This formula is high level and looks at the labour force as an equal group. High achieving employees mask underperforming employees. Timesheet data will help identify underperforming employees.
Netflix is a perfect example of hiring and retaining high achieving employees. Netflix attract and retain high achievers. They don’t have rules (including unlimited leave! – because people hate rules), they use emotional intelligence to inspire employees. In a perfect world we would all love to be Netflix.
We should all set goals and while we would all love to have Netflix’s employees, the reality is that we are a work in progress, and we continue to grow and learn. In reality, Netflix may not have rules but we are certain they would have data that monitors their employees. Each of you will have a different management style, but you all need data to monitor the profitability of employees.
If you would like help to work out the earning capacity of your employees, please contact us email@example.com or Bonita – 0410 068 680 or Jodi – 0414 943 165 or use our booking link – To Make a Meeting Appointment