The FTE Equilibrium

Nov 19th, 2020

 

 

 

 

 

 

 

 

 

 

 

In economics, a state of equilibrium is the balancing effect of supply and demand.[i] Thus, the quantity the producers supply equals the quantity the market demands, and all parties are satisfied by receiving and paying a fair price. Theoretically, it is a win-win situation.

When it comes to employees, businesses also need to ensure that they have the right balance of employees to meet customer demands.  Not enough employee labour can result in missed market opportunities, delivery delays, and frustrated overworked team members. However, too many employees can lead to underutilisation, cash flow issues, and unfulfilled staff.

CBA’s FY19 Business Insights Report highlights that close to half of Australian workers believe their employer is underutilising their skills.[ii]  At the same time, PwC’s annual global CEO Survey states 78% of Australia’s CEOs say that the availability of key skills is a top threat to growth.[iii]

So, what is the FTE Equilibrium for Australian businesses?

The short answer is: it depends on what industry you are in. The right balance of employees can both maximise profits and ensure employee satisfaction; thus, business owners need to determine an FTE equilibrium that meets their business and industry needs.

Firstly, what is an FTE?

In Australia, an FTE stands for Full Time Equivalent, which measures the number of standard-hour workloads worked by an employee. An FTE is not the physical number of employees. To determine the total number of FTE’s, businesses must count all hours worked by all employees and divide them against the standard-hour workload. This includes employees who are:

  • Full-time
  • Part-time
  • Casual
  • Fixed-term
  • Shift workers
  • Daily hire and weekly hire
  • Apprentices and trainees
  • Outworkers

It does not include:

  • Sub-contractors
  • Consultants
  • Work experience students

For more information on determining the number of FTEs in your business, see our Benchmarking FTE calculator here: INSERT

Why we use FTE vs headcount

Using an FTE calculation as opposed to a headcount provides a more accurate reflection of business productivity, overall employee utilisation and business operating needs. It is also important for businesses to know their exact FTE number to determine their eligibility for government subsidies and grant programs. Calculate your FTE number here.

Determining your optimal FTE number

“The process of monitoring your headcount is not a one-time exercise. You should continuously monitor your staff complement as business activity fluctuates to ensure that you do not overwork your employees due to understaffing or pay unnecessary labour costs due to overstaffing”.[iv]

Determining the right FTE number for your business should be a continuous process, conducted by both management and employees themselves.  We have broken this process into five stages:

 

1. Conduct Needs-Based Analysis

The first stage involves conducting a needs-based analysis to determine what type of human resources the business needs. This means detailing all requirements with the anticipated hours expected per task.

For example, a business may need 10 hours of marketing and communications a week, 5 hours of invoicing, 5 hours of customer enquiries, but 60 hours of production labour. Together, this is 80 hours, thus 2 FTE’s. (See FTE calculations here)

This stage forms the “ideal scenario” for businesses and becomes a blueprint of job descriptions. It is vital that business owners develop realistic hours at this stage because, while there must be enough employees to undertake all aspects of work, it is also important to not overwork employees. As research shows, workplace stress leads to an increase of almost 50% in voluntary turnover.[v]

Once established, business owners can then assess the financial viability of their ideal FTE structure.

2. Benchmark Industry

The common method to assess the financial viability of FTEs is to calculate FTEs as a percentage of revenue.  Yet how do you know if your result is a “good” number?

Benchmarking your business against other businesses in your industry gives you the best insight into what your FTE to revenue ratio should be based on your industry. 

Generally, payroll expenses that fall between 15 and 30 percent of gross revenue are in the safe zone for most types of businesses. Service-based businesses where payroll is the primary cost involved in producing the product can have labour costs as high as 50 percent without destroying profitability.[vi]

With the Benchmarking Suite, business owners can compare how their FTE ratio compares to other businesses of similar size and industry, thus helping business owners to structure human resources.  It is vital that this stage is conducted on an industry level, as there can be major discrepancies between services and products.

This stage can support business owners in establishing FTE objectives and implementing strategic decisions to achieve their goals.

3. Track Employee Productivity

Undertaking the aforementioned internal and industry reviews will give most business owners a solid foundation for their FTE structure. From here, businesses can implement productivity monitoring to ensure the FTE ratio to revenue remains on target.

This can be accomplished in a variety of ways, but should always be engaging employees in the process. Employees are more productive when they are engaged and aware of monitoring. A recent report shows that disengaged workers had 37% higher absenteeism, 49% more accidents, and 60% more errors and defects. In organizations with low employee engagement, they experienced 18% lower productivity and 16% lower profitability.[vii]

There are many tools that can be used to track individual employee productivity and the Benchmarking Suite can support organisations to track overall FTE productivity annually.

4. Determine Efficiencies

Investing in tools to make your existing employees more productive can alleviate the long-term costs of excessive employees. Capital investment in the short term can lead to long-term efficiencies and cost savings. [viii]

Improving efficiency is a high priority for the majority of business owners. It may involve reviewing simple processes or investing in new technological resources. Utilising technology to increase productivity does not mean replacing human resources. It means reviewing what tasks can be conducted more efficiently to enable employees to be more productive, thus leading to higher company profits.  By tracking FTE productivity annually via business benchmarking, business owners can determine if efficiencies are improving.

5. Review Resource Investment

You should be able to develop statistical data tied to your industry that allows you to mathematically calculate when an employee hire is required… For example (in our industry), we have determined that for every $35,000 to $50,000 in additional monthly revenue generated, there is a need to hire a new employee. [ix]

Once the above actions are established, businesses will be able to regularly review their resource investment and determine when they need to increase or decrease FTEs, thus continuously aiming for the FTE equilibrium.

The win-win-win of the FTE equilibrium

Investing time into getting the “right” balance of FTEs will pay off for any business owner, as they will achieve a win-win-win scenario. First, employees will be satisfied with having enough work to be utilising their skills, without being overwhelmed and stressed. Second, customers will be happy, as they will receive orders/service in an acceptable amount of time. Lastly, having productive employees results in increased net profits, which is the ultimate win for business owners.

Free FTE Calculator

We created a free FTE calculator tool. Simply enter your email below to access:

 

Interested in benchmarking your clients? We offer a free trial of our Benchmark Suite Reports to accountants and business advisors, click below to benchmark one of your clients today.

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Full Time Equivalent Benchmark Calculation

 

 

 

 

[i] https://www.investopedia.com/terms/e/equilibrium.asp

[ii] https://www.lawyersweekly.com.au/corporate-counsel/25329-almost-half-of-businesses-underutilising-staff-skills

[iii] https://www.pwc.com.au/ceo-agenda/ceo-survey/addressing-australias-skills-shortages-for-future-growth.html

[iv] https://www.analyticsinhr.com/blog/case-study-determined-optimal-staffing-levels/

[v] https://hbr.org/2015/12/proof-that-positive-work-cultures-are-more-productive

[vi] https://smallbusiness.chron.com/much-gross-revenue-should-payroll-18985.html

[vii] https://hbr.org/2015/12/proof-that-positive-work-cultures-are-more-productive

[viii] https://www.business.com/articles/how-to-staff-business/

[ix] https://www.business.com/articles/how-to-staff-business/

 

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