Robyn Barrett, founder and managing member, FSW Funding, Discusses “The Profitability of a Lender”.
April 19, 2013
By Robyn Barrett
In his book Good to Great Jim Collins states, “There aren’t actually all that many companies that make it to great—most are just good.” To be a great company, you need to focus on what you do better than anyone else.
Companies in the business of lending are essentially selling money. Their product is a commodity and they compete with a lot of companies for the same pool of prospects. So, if you’re a lender, how can you position your company to be great? What does your company do better than anyone else?
Most lenders make money—and they are good at it . But only a few are great. In order to determine if they are great, they must have a measurement for success, and then compare the results over time.
There are multiple measures for success, but one key measure is profitability. The three ways to measure profitability are by employee, product or client. In part one of this three-part series, I will examine ways to measure employee profitability.
The Human Factor
Lenders typically focus more on measuring yield rather than the contributions of talented people. Employees, the people that help a company succeed, are typically the largest business expense, and often the least measurable when it comes to productivity and profit.
The most straightforward calculation is the ratio of revenue per employee. The revenue per employee tells us whether or not a business is generating adequate sales/income relative to its assets and people. This ratio allows us to compare the relative efficiency of similar but different-sized companies on a more equal footing.
Revenue per employee ratios are easy to calculate, but the underlying explanation for differences might be quite complex. For example, it may not be possible to bring an entire sales staff up to the performance of a sales superstar. However, if you use the ratio over a period of time you can see how effective or ineffective a sales team performs. Then, look behind the ratio to see how to improve it.
Similarly, the explanation for the difference between two companies with different revenue per employee ratios might not be obvious, but it can still be a good measure of relative success. For example, a decreasing ratio may indicate a weakness in management.
Another method for measuring profitability by employee is called Human Capital Return on Investment (HC ROI), which provides a comparative measure of added value per full-time employee. HC ROI looks at the ROI in terms of profit for investments made on total labor cost by using an adjusted operating profitability figure calculated by subtracting all expenses, except for labor expenses from revenue and dividing the adjusted profit figure by the total headcount. HC ROI directly shows the amount of profit derived for every dollar invested in labor cost—that is, the lever age on labor cost. This is a pretty straightforward measure and can easily be compared period to period.
Improving the Ratio
Regardless of the methodology, it is essential to increase profit per employee. Fortunately, the tools available to do so in today’s market are unprecedented.
For example, leveraging technology can eliminate redundancy; it can create an environment of shared information and automate sales and distribution channels. Technology can also eliminate brainless tasks and allow employees to be positioned and empowered to add value to the organization, which in turn will have a positive impact on profit per employee.
In an interview with Fast Company, Jim Collins stated, “The single biggest constraint on the success of my organization is the ability to get and to hang on to enough of the right people.” Thus, a major component to getting from good to great is hiring the best people for the job. Easy, right?