Employees and Sales Efficiency

Do you wonder if there is a way to measure if your sales justify your employee head count and payroll expense? Here are two ways and some refinements.

Payroll to Sales

Payroll to sales is a percentage calculated as:

Payroll to Sales Percentage = (Payroll Expenses / Sales) * 100

The lower this percentage, the more it appears you are getting a good return in sales for what you spend on payroll. Of course there are some other things to consider, such as:

  • Are you having significant bad debts? If so, perhaps your sales people are selling to the wrong customers or your credit policies need revising.
  • Have you looked at this in relation to payroll by functional area? For example, is the percentage of administrative payroll to sales growing? Ask the same question in regards to the sales department payroll. Ideally, you would want both of these percentages to be decreasing, but especially the administrative one.
  • Even if you have excellent sales, are the gross margins sufficient or better?

Looking at the payroll to sales statistic in reverse can be revealing as well. For example, dividing Sales by Payroll Expenses give you an idea of how well your sales cover payroll expenses. The higher this number the more your sales cover your payroll expenses. For example, assume the following information:

Company A has Sales of $3,000,000 and payroll expenses of $1,125,000.

Company B has Sales of $3,000,000 and payroll expenses of $1,500,000.

So for company A:

Payroll to Sales Percentage = ($1,125,000 / $3,000,000) * 100 = 37.5%

Payroll Coverage = $3,000,000 / $1,125,000 = 2.67 times that payroll expenses are covered.

And for company B:

Payroll to Sales Percentage = ($1,500,000 / $3,000,000) * 100 = 50%

Payroll Coverage = $3,000,000 / $1,500,000 = 2.00 times that payroll expenses are covered.

Obviously you would probably prefer the situation of company A. Before you decide let’s look at another statistic.

Sales per Employee

Another way to look at the efficiency of sales in regards to employees is in relation to headcount rather than payroll expenses. This is calculated as follows:

Sales per employee = Sales / Number of Employees

So in the examples above, assume the Company A has 20 employees and Company B has 15 employees. The calculations would be:

Sales per employee for company A = $3,000,000 / 20 = $150,000 per employee

Sales per employee for company B = $3,000,000 / 15 = $200,000 per employee

When sales efficiency is measured as sales per employee company B looks better. This illustrates why it makes sense to use several financial ratios to measure performance. Incidentally, today with so much automation and the efficiency added via e-commerce, the sales per employee should be trending up, even after removing the impact of inflation.

What About Your Company?

At your company do you measure the efficiency with which you generate sales? Is your payroll to sales out of whack? Are your sales per employee trending up or down?

Most importantly, if you are seeing unfavorable trends, what steps can you take to correct them? Can you sell higher priced items that have as good or better gross margins without increasing your payroll expenses or headcount significantly?

Obviously these are just a few of the statistical calculations for sales, but they are well worth considering.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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