Background
Using metrics is essential for any business, whether a small, medium, or large-capital company. Metrics is the study of quantitative data that helps evaluate the efficiency and effectiveness of business operations (Raquel Merlo, 2022). As a result, after analyzing specific metrics, such as those concerning productivity, compensation, learning and development, and demographics, the management can have a clear picture of the firm’s health and potential (Raquel Merlo, 2022).
In the case of Flower Shop, metrics are essential for several reasons. First, metrics are important in terms of making informed decisions about the business. For instance, when evaluating metrics, Kathleen can look into workforce efficiency and decide whether to hire more people to optimize business operations. Moreover, by tracking measures and the change over the years, Kathleen can see whether the strategies were successful in implementation and whether the same approaches have to be sustained.
Another reason the use of metrics is essential is the involvement of governmental bodies. By incorporating metrics and analysis into her financial statements and reports, Kathleen can demonstrate that she is being held accountable for all operations and is transparent with the business. Suppose the business owner includes metrics in reports.
In that case, she can show the value of direct service costs and the importance of good salaries and training for staff retention (Raquel Merlo, 2022). As a result, she will avoid the risks of being scrutinized by governmental bodies. Thus, it will be possible to uphold the company to the standards and expand further.
Productivity
Revenue per FTE
The first metric, revenue per full-time equivalent (FTE), is useful for measuring the revenue generated through FTE operations. This statistic is crucial since it assesses whether or not a company is developing successfully (Human Resources Management Association, 2014). Such an indicator, for instance, might be used to decide if a developing firm needs to recruit more employees (Human Resources Management Association, 2014).
Moreover, it can help establish a warning when sales are consistent, but the workforce required to generate it is expanding more quickly (Human Resources Management Association, 2014). In the case of Flower Shop, Revenue per FTE increased from 78,873.2 in 2018 to 84,647.9 in 2019, which is a 7.32% increase. The measure in the given case indicates that the company is successful in its operations and that employees bring in more revenue per person each year. Thus, the scaling of business operations is efficient at the moment.
Revenue per FTE = Revenue / Permanent FTE
- (2018) = 2,800,000 / 35.5 = 78,873.2
- (2019) = 3,005,000 / 35.5 = 84,647.9
Profit per FTE
The profit per FTE metric is essential and demonstrates how much pre-tax net income was generated through FTE operations. Operating costs are associated with important costs to keep the business running. This statistic is quite useful for established businesses that want to maximize their personnel’s overall contribution (Human Resources Management Association, 2014).
When combined with the labor cost per FTE and labor cost expense percent, they can show whether an organization has the appropriate personnel in the appropriate location and cost to achieve its strategic goals (Human Resources Management Association, 2014). When calculating the measure for the Flower Shop, it is important to note that operating costs include the cost of goods sold, the rental of the Flower Shop facility, the rental of the delivery truck, the cost of Staff training, Office supplies, Marketing expenses, Insurance, Travel, and Utilities. While these expenses are essential for maintaining business operations, they are unrelated to labor costs.
Profit per FTE increased from 52,535.8 in 2018 to 57,056.3 in 2019, an 8.62% increase. Consequently, the given measure indicates a more efficient and productive workforce. The given metric and the one discussed above are useful when setting revenue and profit per employee targets and identifying areas for improvement.
Profit per FTE = (Revenue – Operating Cost) / Permanent FTE
- (2018) = (2,800,000 – 934,980) / 35.5 = 52,535.8
- (2019) = (3,005,000 – 979,500) / 35.5 = 57,056.3
Human Capital Return on Investment
Another important metric that Flower Shop must use is Human Capital Return on Investment. This metric shows “the rate of return for each dollar invested in employee pay and benefits (labor costs)” (Human Resources Management Association, 2019, p.3). Labor costs are expenses related to paying employees. In this case, labor costs include Wages as salary, Mandatory benefits, and Extended health and medical benefits.
The metric is important for Flower Shop since it can demonstrate how much profit is generated by workforce output. It can calculate the effectiveness of people practices and a company’s ability to create value (Human Resources Management Association, 2014). For instance, after calculating the business metrics, one can see that the 2018 Flower Shop’s 130% return generated $1.3 for every dollar spent on employee compensation.
Meanwhile, the next year’s results showed a 7.69% decrease, with $1.2 generated for every dollar spent on compensation. However, after looking at the 2018-2019 financial statements, it becomes obvious that such a decrease does not indicate decreasing financial health and stability. Instead, it demonstrates that the management has significantly increased the benefits received by employees and introduced raises.
Human Capital Return on Investment = {(Revenue – (Operating Cost – Labor Cost)) / Labor Cost} – 1
- (2018) = {(2,800,000 – (934,980 – 1,389,284)) / 1,389,284} – 1 = 1.3 = 130%
- (2019) = {(3,005,000 – (979,500 – 1,691,005)) / 1,691,005} – 1 = 1.2 = 120%
Absenteeism Rate
The absenteeism rate is another valuable metric that companies can use to determine the efficiency of their workforce. It demonstrates the number of working days missed per permanent FTE due to illness (Human Resources Management Association, 2014). When used along with the HR efficiency metric, it can indicate which programs are most efficient (Human Resources Management Association, 2014).
In the case of Flower Shop, the number of missed working days per employee in 2018 was 0.8, while in 2019, there was a significant rise, up to 1.4 days, which is a 75% increase. Usually, an increasing rate of absenteeism can demonstrate poor employee engagement and well-being. In 2018 and 2019, employees had to face measles and the flu. As a result, considering the pressure and stress from having to increase workload at such moments, the area needs improvement.
Absenteeism Rate = Sick Days / Permanent FTE
- (2018) = 30 / 35.5 = 0.8
- (2019) = 50 / 35.5 = 1.4
Compensation
Labor Cost per FTE
When it comes to labor metrics, plenty are useful when determining the workforce’s efficiency. For example, the first is labor cost per FTE, which demonstrates the costs associated with each full-time employee (Human Resources Management Association, 2014). It is important since it clearly shows labor costs and how they influence overall expenditures. The metric can be used in business development to set targets for labor compensation and its optimization. Flower Shop’s Labor Cost per FTE increased by 21.72%, indicative of increases in compensation and benefits, which can positively influence employee engagement and performance.
Labor Cost per FTE = Labor Cost / Permanent FTE
- (2018) = 1,389,284 / 35.5 = 39,134.8
- (2019) = 1,691,005 / 35.5 = 47,633.9
Labor Cost Expense Percentage
Another crucial measure that can be used to understand the profitability and successful allocation of resources is the Labor Cost Expense Percentage. The given metric indicates how much money is associated with labor expenditures as a percentage of expenses (Human Resources Management Association, 2014). It can be used to determine whether revenue is being sacrificed for labor compensation.
In the case of Flower Shop, management pays $1.48 of labor costs for each dollar of operating costs. A similar situation was in fiscal year 2018-2019, with the company spending $1.72 on labor costs for each dollar of operating costs. This can be detrimental to the firm’s financial health since it can indicate growth and opportunity limitations. The company’s goal is to expand, so labor compensation might be considered.
Labor Cost Expense Percentage = Labor Cost / Operating Cost
- (2018) = 1,389,284 / 934,980 = 1.48
- (2019) = 1,691,005 / 979,500 = 1.72
Labor Cost Revenue Percentage
The Labor Cost Revenue Percentage metric also indicates proper management of resources and funding. This measure is important since it shows how much money is spent on labor costs as a percentage of generated revenue (Human Resources Management Association, 2014). The metric can be used to understand whether cutting labor costs is necessary to grow revenue.
When analyzing the results, Flower Shop spends $0.56 on labor compensation, generating one dollar of revenue. As for 2019 results, $0.56 spent on labor compensation yields a dollar of revenue. Therefore, although the company makes more revenue, the expenses are proportionately increased. The company might need to consider cutting labor costs or slowing the increase in compensation and benefits.
Labor Cost Revenue Percentage = Labor Costs / Revenue
- (2018) = 1,389,284 / 2,800,000 = 0.49
- (2019) = 1,691,005 / 3,005,000 = 0.56
Benefits as a Percentage of Labor
The final metric in the context of compensation evaluation is the Benefits as a Percentage of the Labor ratio. The given ratio illustrates what percentage of labor costs are allocated to benefits. It is helpful since it allows us to see the employee reward trend. It can be used to see whether optimization is required in the area and whether there have been changes in the benefits paid to the employees. When calculating the measure for Flower Shop, it is essential to note that benefits include Mandatory and Extended health and medical benefits.
After reviewing the results, it is obvious that there has not been a significant change in the context of benefits, meaning that all of the increase in labor costs is associated with direct compensation. Thus, although the benefits area can remain the same, it again emphasizes that compensation levels might need to be reconsidered.
Benefits as a Percentage of Labor = Benefits / Labor Costs
- (2018) = 295,359 / 1,389,284 = 0.21
- (2019) = 359,505 / 1,691,005 = 0.21
HR Efficiency
HR Cost Per Headcount
One metric, such as the HR Cost per Headcount, must be mentioned when discussing HR efficiency. This metric is important since it shows how much money each employee spends on recruiting and retention (Human Resources Management Association, 2014). The measure can be used to determine the efficiency of the company’s HR practices. When calculating the metric, it is crucial to note that HR costs in the Flower Shop refer to two HR Generalists and one HR Manager.
It was emphasized that the annual salary of the HR manager is $55,000, and HR generalists are paid $45,000 each, with a 5% raise in the 2018-2019 fiscal year. After finishing the calculations, it can be seen that the business puts great value on its employees since it spends more on HR each year to retain staff. Thus, its commitment to personnel can be seen through increased compensation and HR expenses.
HR Cost Per Headcount = HR Costs / Permanent Headcount
- (2018) = 145,000 / 50 = 2,900
- (2019) = 152,250 / 50 = 3,045
Learning and Development Investment per FTE
Another essential metric that helps see the commitment to staff is the learning and development investment made by the company. This ratio is important since it shows the amount of funding allocated to fulfill employees’ potential and contribute to their professional growth. It can determine whether the company is effective in its operations with learning promotion and whether the teams stagnate or continue developing their skills and expertise.
In the case of Flower Shop, learning and development investment per employee nearly doubled in one year, growing from $422.5 per person to $704.2 per person. With the number of full-time employees remaining the same, the team benefits greatly from such improvements and investments. After looking at the revenue, specifically in-store and online sales, in the 2017-2018 and 2018-2019 fiscal years, it becomes evident that such investments are beneficial. Sales grew from $650,000 to $750,000 in one year, a 15% increase.
Learning and Development Investment per FTE = Learning & Development Cost / Permanent FTE
- (2018) = 15,000 / 35.5 = 422.5
- (2019) = 25,000 / 35.5 = 704.2
Diversity Percentage
The last ratio that can be calculated for a business concerns diversity in the company. Diversity is essential since it allows managers to improve not only the performance and engagement of the employees but also the workplace culture (Loon, 2022). The diversity percentage is important since it shows whether the company embraces and promotes diversity.
It can be used as a metric to determine the company’s workforce strength. In the case of Floral Shop, two floral designers from the Nisga’a Nation in British Columbia are honored to be of Aboriginal descent. By displaying Aboriginal art in the shops, they enhance the local culture.
Additionally, two designers are new Canadians and visible minorities from Kenya. Finally, two marketers are proud members of the Métis Nation of Ontario and are of Aboriginal descent. However, as seen from the calculation below, only 12% of the personnel are members of minorities. Yet, considering the expansion expected by the management, new recruiting processes can improve this figure and bring more diversity into the workplace.
Diversity Percentage = Permanent Employees who Self-Identify as an Aboriginal Person, Person with a Disability, or Member of a Visible Minority / Permanent Headcount = 6 / 50 = 0.12 = 12%
Recommendations
Although the company already has steady revenue growth, its net income stagnates, which needs to be resolved to encourage organic and steady growth and expansion. After reviewing Flower Shop’s financial statements and calculating productivity, compensation, learning and development, and demographic metrics, two issues have been identified.
The first issue is related to the number of missed working days per employee, which has increased significantly from 0.8 days in 2018 to 1.4 days in 2019, representing a 75% increase. This increase has put additional pressure and stress on the remaining employees to cover absentees. The second issue concerns the company’s expenditure on labor compensation, which is currently at $0.56 for every dollar of revenue generated. Therefore, both of these issues can significantly decrease the company’s performance, which necessitates change.
The first recommendation to the company is to address the issue of missed working days, which can be done in several ways. The company can implement records that consider providing employees with more flexible working hours or offering options for working from home, given that the shop has both online and offline operations (Snell & Morris, 2022). Such a decision can help improve performance since employees can work from home if they cannot come to the office for personal reasons.
Another policy that can be implemented is the employee attendance policy. The policy can monitor employee attendance and involve rewards for those with perfect records (Nelson & Trevino, 2021). To see which employees work overtime and must be rewarded, Flower Shop can additionally use the Overtime per Individual Contributor metric. This can decrease instances of employees covering for absentees due to incentives or alternatives.
Lastly, Flower Shop will have to review its compensation policy to ensure that it is cost-effective in improving its net income. First, the business should consider implementing a performance-based compensation system (Shields, 2020). This approach will help reward those who directly contribute to an increase in sales and revenue and who perform perfectly (Shields, 2020).
Through this recommendation, it will be possible to reduce compensation expenses for those with poor attendance records and performance while motivating those who contribute to the company’s revenue. Moreover, since the company does in-store sales and helps with events, such as weddings, hiring part-time workers during peak seasons can help with the workload. It will reduce the pressure put on full-time employees and lower labor costs. To maintain employee opportunities, the business can regularly calculate the promotion rate, which is important to see whether there are career possibilities, and the retention and growth of talent.
References
Human Resources Management Association. (2014). HR metrics interpretation guide. Web.
Human Resources Management Association. (2019). Standards & glossary.
Nelson, K. A., & Trevino, L. K. (2021). Managing business ethics: Straight talk about how to do it right. Wiley.
Loon, K. (2022). Fostering culturally diverse leadership in organisations: Lessons from those who smashed the bamboo ceiling. United Kingdom: Taylor & Francis.
Raquel Merlo, T. (Ed.). (2022). Understanding, implementing, and evaluating knowledge management in business settings. IGI Global.
Shields, J., Kaine, S., Brown, M., & Rooney, J. (2020). Managing employee performance and reward: Systems, practices and prospects. Cambridge University Press.
Snell, S., & Morris, S. (2022). Managing human resources. Cengage Learning.