By: Rick Phelps, Principal, Synchronous Solutions
Mark recently showed me a YouTube video of a renowned business advisor talking about the revenue per employee required for an HVAC company to be acceptably profitable. The number tossed out was $350,000+ per employee. Interesting! Here is how to determine what that number should be in your business.
Let’s take a $12M per year shop that spends 35% (roughly the industry average) on buying materials from suppliers. Let’s define ‘acceptably profitable’ as 10% Net Profit.
We know 100% Revenue is equal to:
+ 35% Truly Variable Expenses paid to suppliers,
+ 10% Net Profit for the company to re-invest, which leaves
+ 55% Operating Expense to pay all the bills
(which equates to a 65% Throughput Ratio)
Looking at just Operating Expense, we can break this down to all Labor expenses and everything else. To keep it simple, let’s assume Labor makes up 60% of the Operating Expense, and therefore 55% x 60% = 33% of Revenue, leaving 22% of Revenue to pay for everything else.
We calculate the Productivity Score of a business as Throughput over Operating Expense:
65% / 55% = 1.18 Productivity Score – the return on your Operating Expense
We can calculate the Labor Productivity Score the same way:
65% / 33% = 1.97 Labor Productivity – the return on your Labor Expense
The Revenue of our company is $12M per year or $1M per month. The Labor Expense is therefore $1,000,000 x 33% = $330,000.
If this company’s average total labor expense is $5,000 per month, this would mean they have $330,000 / $5,000 = 66 employees.
$12,000,000 / 66 employees equals about $182,000 in Revenue per Employee.
Reworking the numbers for this business to be exceptional with a 20% Net Profit, you would have:
54 employees,
$222,000 in Revenue per Employee,
2.40 Labor Productivity Score.
Business is math. Know your numbers!
