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profitability

How Does Business Automation Increase Business Profit?

Revenue alone is not a reliable indicator of the profitability in a business. Measuring revenue per employee can help you understand where your business sits within your industry in relation to your potential revenue earnings. Below is a graph detailing the average revenue per person by industry for the 2018-19 FY. 

Take for example the Information, Media, and Telecommunications Industry. The industry average revenue (from sales and service income) per person is $490,200.

Revenue Per Employee

Source: Australian Bureau of Statistics 31st May 2019

As you can see in the graph above each industry varies greatly, so do not compare your figures with other industries. These figures may seem high at first, but we need to remember this is gross revenue, before any expenses or wages have been taken out. To measure your Revenue per Employee, use the formula below:

Revenue Per Employee = Net Sales / Number of Employees

The next figure to work out is the Payroll to Revenue Ratio. This formula considers the total labour costs (wages, superannuation, insurances, tax) divided by your net sales as a percentage.

Payroll to Revenue Ratio = Labour Cost / Net Sales *100

EXAMPLE: A business earning $500,000 in Net Sales, with 5 employees the Revenue per Employee figure is $100,000. Labour cost is $250,000 which results in a Payroll to Revenue Ratio of 50%. The aim is lower that percentage as much as possible. There are two approaches to achieve this: 

  1. Reduce the number of staff. In the example above, if the number of employees was reduced to 4, then the Payroll to Revenue Ratio is reduced to 40% resulting in a savings of $50,000. Of course, the amount of work may not change, so ask yourself what tools/skills could your employees benefit from in order to increase performance?
  2. Increase sales. Easier said than done right? With the example business above, what if the earnings increased by 10% to $550,000? with 5 employees the Payroll to Revenue Ratio is reduced to 45% resulting in labour cost remaining the same (at $250,000) with an extra $50,000 in revenue towards growth. How difficult would it be to increase sales by 10%? Think about which tools/skills could your employees use to increase sales performance?

In business today, a significant amount of work is done online with the use of software applications. There is one for finance, customers, operations, project management, website, marketing and of course the good old favourite, spreadsheets! Some applications are integrated and talk to each other, some are not. Making sense of these is a mammoth task unto itself, let alone the cost! How many applications does your business use? How many software subscriptions do you pay for?

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