A company is only as good as its employees. Most employers have heard this quote, or some variation of it, which is one reason the scramble to find talent is so important. And when you do hire employees, you want to make sure your business benefits from them.
You don’t want to spend thousands of dollars on an employee wages unless they positively impact your bottom line in business. Human capital metrics show you the value an employee adds to your company by quantifying performance.
What is human capital?
As a business owner, you constantly invest in your company. You hope that your investments will lead to more revenue and faster processes. To find out if your investments are worth your trouble, you measure how much money your new assets bring your business.
Human capital is the value an employee’s skills, knowledge, and experience add to your business. You invest in your company every time you hire a new employee.
Hiring and training costs can be offset by the value an employee returns to your business. Investing in an employee is not the same as buying a piece of equipment, but you should still be able to measure the value they add to your company. Being able to quantify how employee performance and hiring costs affect your bottom line is an important part of managing your books.
You need to see how much value the employee adds to your business by measuring human capital. It’s also important to see how much you invest in each employee.
Use metrics that measure human capital value to answer questions like, “Does my employee bring in more money than what I pay them?” and, “How much did I invest in training each employee?”
3 helpful human capital metrics
Deciding to create a human capital valuation model can be very beneficial to your business. Learning how to measure human capital can help you make hiring, training, and promotion decisions.
Here are three important metrics related to human capital you should be tracking.
Human capital ROI
The human capital ROI is the main measurement of human capital that business owners use to compare an employee’s value to their expenses.
Human capital ROI (return on investment) is a ratio that shows you how much your business earns compared to employment costs. You can use this to see how much is returned for every dollar invested.
Employment costs can include things like salaries, health insurance premiums, retirement plan contributions, and education assistance.
Here is the formula for the ROI of human capital:
Human Capital ROI = (Revenue – Operating Expenses – Employee Compensation) / Employee Compensation
For example, you want to find your human capital ROI for October:
- Your business brought in $80,000 in revenue.
- Your operating expenses were $30,000.
- You paid your employees a total of $20,000 in wages, and you had $9,000 in benefit costs for a total of $29,000 in compensation costs.
($80,000 – $30,000 – $29,000) / $29,000 = .72
Your human capital ROI was .72, or 72%. This means you had a return of $0.72 for every $1.00 invested.
Training investment value
If you want to see how much money you spent on each employee for training, use the training investment value. This will show how much money you invested into human capital.
The formula for training investment value is:
Training Investment Value = Total Training Investment / Headcount
You will need to know how much you spent on training as well as how many employees went through the training.
Let’s say you hired four new employees and spent a total of $10,000 on training. Your training investment value would be:
$10,000 / 4 = $2,500
You invested $2,500 into training each new hire.
Turnover rates
As an employer, you know that hiring and training expenses can add up. After pouring money into an employee, you don’t want them to leave. Knowing how to calculate turnover rates can show you what percentage of your workforce leaves during a specific time period.
Here is the turnover rate, or voluntary separations, formula:
Turnover Rate = (# of Separations / Average # of Employees) X 100
For example, you want to find your turnover rate from January to July. You had four employees leave, and your average number of employees was 25.
(4 / 25) X 100 = 16%
Your turnover rate was 16%. That means that 16% of your workforce left during this time period. You would need to spend money replacing the employees who left your business.
Accounting for human capital
Don’t forget about the value human capital adds to your business. By using human capital measurement metrics, you will have a greater understanding of how your employees impact your accounting books for small business.
Employees are listed as an expense in your books. But with a human capital asset management system, you view your employees as assets.
When you lose an employee, you don’t just lose an expense. You also lose a valuable asset to your company. Invest in employees with successful training, educational assistance, and easy-to-use technology.
Make sure your accounting books are up to date. Patriot’s online accounting software lets you track expenses and income. Get your free 30-day trial now!
This article has been updated from its original publication date of November 9, 2017.
This is not intended as legal advice; for more information, please click here.