No matter what business you're in, talent is at the center of what you do. So you need to know the cost of losing an employee.
No matter what business you're in, talent is at the center of what you do. Management guru Peter Drucker once said, "The most valuable assets of a 20th-century company were its production equipment. The most valuable asset of a 21st-century institution, whether business or non-business, will be its knowledge workers and their productivity."
This means that each vacancy at your workplace comes with a very real price tag. Knowing how to calculate the cost of losing an employee can help you move forward.
Employees and Revenue
While you can hope that good employees will work for you forever, it's simply not realistic. People leave for a variety of reasons, and it's important to figure out the cost of losing an employee and understand the impact of that vacancy on revenue. Do this by calculating the quantifiable revenue per employee (QRPE).
Broadly, there are three ways your employees impact your bottom line. First, you have revenue generators, or people who interact directly with customers and bring in revenue. Then there are revenue enablers, who play supporting roles to the revenue generators. Think administrators and IT. Finally, you have revenue protectors, who provide services such as legal, security and compliance to safeguard your revenue.
Calculating Their Daily Cost
There are multiple ways to calculate QRPE. One way factors in a given employee's role. For example, calculate the daily cost of a revenue generator by taking the amount of annual revenue they produce and dividing it by 255, which is the number of business days worked in a year. So someone who generates $500,000 in sales each year results in about a $1,961 daily loss if they leave.
Another method of calculating QRPE, especially when it comes to revenue enablers and protectors, is to divide your entire annual revenue by the total number of employees on your team. For example, if your annual revenue is $5,000,000 and you have 25 employees, each employee is worth about $784 per day. While this number doesn't take into account an individual's impact on revenue, it does provide a ballpark amount that could help you understand a single employee's impact.
Having a QRPE helps you to understand the cost of losing an employee. With this number in mind, you can see why it's important to address vacancies in a swift fashion by having a robust talent pipeline. Start an internship or employee referral program, for example. Or hire temporary workers to fill the spot until a permanent replacement is found.
The QRPE also measures your organization's operating efficiency, helping you determine if you have the right number of employees. For example, if revenue is flat and employees complain about feeling overwhelmed, perhaps it's time to add new hires to share the load. Or if your QRPE is low in comparison to the amount you spend in employee compensation, perhaps you're overstaffed.
By understanding the impact departing employees have on your organization's revenue, you can make better decisions about the future of your business.