EM3091 - Examining Accounts: Business Ratios: Wages to Turnover

Depending on the nature of the trade, it may be worth looking at the proportion of turnover generated by each employee:

• Sales / Number of Employees = Sales per Employee

Does the figure of sales per employee seem realistic? It may be possible, in some service trades, to estimate the number of sales per employee. A simple example is set out below.

In a hairdresser’s, a wash, cut and dry is advertised at £20 (£17.02 plus £2.98 VAT). Turnover in the accounts is £200,000 (excluding VAT). Assuming only the three stylists and the proprietor take appointments and the trainee merely washes hair, turnover for each will be £50,000 or 2,937 appointments. On a five day week that is 12 or 13 cuts a day - allowing for five weeks of holidays. If each cut averages about 20 minutes for the stylist and they work an eight hour day, they are occupied for just over half each working day. An increase over previous years would indicate an improvement in productivity, and might explain a decline in the asset utilisation ratio.

If any employees are being paid more than a working proprietor or director this might bring the net profit or remuneration figures into doubt. A review of the employees themselves - current and previous jobs and addresses - can reveal domestic staff or relatives on the payroll.

If you do not know the number of employees you could compare sales with the total wages in the accounts.