Potential Profit & Cash Formula: Additional RPE - current year figure RPE x yearly target employees

I've put a side by side view of the future numbers (left screen) and current numbers (right screen) to show where the figures come from. Both of these dates are set to June 2023 in this example (red button). Revenue per employee (RPE) is currently 77,780

In this example a 1% improvement to RPE increases the yearly target to £78,557 from £77,780. The difference is £777 and if you multiply £777 by the number of current employees, 6, then you achieve the potential profit and cash improvement figure of £4,621 (accounts for rounding).

In this example, I've also improved the current revenue by £100,000. If the revenue too increases by 1%, then the £4,621 also increases to £5,611 (5,611 - 4,621 = 990). £5,611 divided by yearly target of 7.21 employees = £778 (£777 rounded) or 1% of current RPE figure of £77,780.

If we improve our RPE, then we don’t need extra employees because if we improve our efficiencies and the current team improve their workloads, then that extra £100K of revenue goes straight to the bottom line. And we can actually reduce a team member down from 6 to 4.7 (£99K target (£1K from revenue)) profit of £100K.

Revenue per employee is our favourite number at Clarity because it looks at the business holistically. In other words, it touches every part of the business. As an example, these parts include:

The profit improvement figure on the 5 Levers of Success screen for Revenue per Employee is a guide of what profit could be obtained with improvements to efficiency (completing tasks with less effort and/or time) and effectiveness (getting better quality outcomes). With it being a guide, and because mathematically it involves both increases in revenue and reduction or increases in overheads, it is not included within the calculations when creating a Financial Plan in the platform.

Service based businesses (eg. web designers):
For service based businesses the profit improvement for Revenue per Employee infers that the people in the business are able to do more (with more effort and/or less time) and get more consistent and better quality results. An example of this could be a new piece of technology now being able to automate tasks. Or a better process being implemented for all the people to follow to get the same great result every time and in less time.The profit improvement figure assumes that the new found spare capacity will be fully utilised. Thus the extra revenue from efficiency and effectiveness improvements going straight to operating profit because the people have already been paid for their time.

Product based businesses (eg. manufacturers):
For product based businesses (those that make things) the profit improvement for Revenue per Employee infers that there is less waste of materials and more can be made from the same amount of materials. This could be because of a new way of working, a different type of material or better technology. In other words, it relates to innovation.The profit improvement figure assumes that the new found spare products will all be sold. Thus the extra revenue from efficiency and effectiveness improvements going straight to operating profit because the materials will have already been paid for.

Service and finished product based businesses (eg. retailers):
For businesses that combine service and finished products the profit improvement for Revenue per Employee infers that the people in the business are able to do more (with more effort and/or less time) and get more consistent and better quality results. An example of this could be a better warehouse layout so things can found and shipped quicker. Or a new Point of Sale (POS) system for online and bricks and mortar stores so stock reordering is better managed.

Summary:
Regardless of the business type, it’s about doing more with less to save wasted materials and/or time.One point to note, there could be additional costs for investment in technology etc. The investment cost, and estimated additional revenue from the investment, can be manually added to the Financial Plan and Cash Flow Sense Check.Remember, the 5 Levers of Success are a guide and not a guarantee for additional profit and cash. Somethings will be easier than others to obtain. But with you holding the client accountable and asking questions they’ll no doubt achieve their target.