Understanding the productivity of your employees is one of the main ways to drill down into your business’s overall operational efficiency. That’s why business owners should be familiar with the profit per employee formula.
Want to know more? Learn how to calculate profit per employee, as well as the uses of the profit per employee ratio, right here.
Definition of profit per employee
Profit per employee, also referred to as net income per employee (NIPE), is a metric that you can use to calculate your business’s net income divided by the total number of employees. Put simply, it tells you how much profit each of your employees brings in over the course of a given period. Theoretically, the higher your net income per employee, the more efficient your company.
Factors affecting your profit per employee ratio
Because labor requirements vary drastically from industry to industry, profit per employee formulas are usually used to compare businesses within the same industry. For example, retail companies have very different labor needs than tech companies, so profit per employee isn’t a particularly meaningful way to compare these types of companies with one another.
In addition, employee turnover can have a dramatic effect on net income per employee. Turnover requires your business to interview, hire, and train new workers. Over the onboarding process, your existing employees become less productive (because they need to mentor the new recruits) and since your new employees are learning the ropes, they’re not operating at full capacity yet.
The age of the company can also influence profit per employee. Younger companies tend to have lower revenues and profit margins, particularly in the very early stages, which means that their net income per employee ratio is likely to be smaller than that of an older company.
How to calculate profit per employee
There’s a simple profit per employee formula you can use to calculate the ratio
Profit Per Employee = Net Profit / Full-Time Equivalent Employees
Before completing the profit per employee calculation, you’ll need to know your business’s net profit, as well as the total number of full-time equivalent employees on your books.
Profit per employee calculation example
You can explore the practical implications of the net income per employee calculation with a real-world example. Imagine that Company A employs 25 people and has an annual net profit of around $600,000. You can use the profit per employee formula like so:
Profit Per Employee = $600,000 / 25 = $24,000
This means that the profit per employee is $24,000 on an annual basis, or in other words, each employee generates around $24,000 of profit each year.
How to use the profit per employee ratio
The profit per employee ratio can be used to compare the operational efficiency of companies within the same industry. Out of context, profit per employee isn’t an especially valuable metric. By investing in better technology or skilling up your employees, you may be able to increase your profit per employee and become more efficient.
Profit per employee vs. revenue per employee
Another metric that you may be interested in is the revenue per employee ratio. Unlike the profit per employee formula, revenue per employee doesn’t consider income and costs. This means that it may provide you with a more accurate understanding of your core operational efficiency. However, as it doesn’t factor labor costs into the formula, it’s important to remember that the revenue per employee ratio doesn’t give you the whole picture.
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