What Is Attrition in Business?

The term attrition refers to a gradual but deliberate reduction in staff numbers that occurs as employees leave a company and are not replaced.

It is commonly used to describe the downsizing of a firm’s employee pool by human resources (HR) professionals. In this case, downsizing is voluntary, where employees either resign or retire and aren’t replaced by the company.

Understanding Attrition

Employee attrition refers to the deliberate downsizing of a company’s workforce. Downsizing happens when employees resign or retire. This type of reduction in staff is called a hiring freeze. It is one way a company can decrease labor costs without the disruption of layoffs.

There are a number of reasons why employee attrition takes place. They include:

• Unsatisfactory pay and/or benefits
• Lack of opportunity
• Poor workplace conditions
• Poor work-life balance
• Illness and death
• Retirement
• Relocation

Types of Attrition

Voluntary Attrition

Voluntary attrition occurs when employees leave a company of their own volition. Employees leaving voluntarily may indicate that there are problems at the company. Or, it may mean that people have personal reasons for departing that are unrelated to the business.

For example, some employees voluntarily leave when they get a new job elsewhere. They may be moving to a new area which makes the commute impossible. They might have decided to try a different career and therefore need a different type of job.

Voluntary attrition can also occur when employees retire. This is also referred to as natural attrition. Unless a company experiences an unusually high rate of early retirements, employees retiring shouldn’t be a cause for concern for management.

Involuntary Attrition

Involuntary attrition occurs when the business dismisses employees. This can happen because of an employee’s poor or disruptive performance. Dismissal might be tied to an employee’s misconduct.

Companies may have to eliminate an employee’s position. Or, they might have to lay off employees due to worrisome economic conditions.

Internal Attrition

Internal attrition refers to movement out of one department or division and into another. The employee isn’t leaving the company. They’re simply making a move within it.

For instance, internal attrition can occur when an employee gets promoted to a different management level. Or, they move laterally to a different section because a job there was more suitable.

Internal attrition can signal that a company offers good opportunities for career growth. On the other hand, if one department has a high internal attrition rate, it may be experiencing problems. The company should investigate and address them, if need be.

Demographic-Related Attrition

Demographic-related attrition results when people identified with certain demographic groups depart a company unexpectedly and quickly. These could be women, ethnic minorities, veterans, older employees, or those with disabilities.

Such an exodus could mean that employees have encountered some form of harassment or discrimination. That should be of concern to all companies because such behavior can undermine a positive workplace environment and successful business operations.

Action should be taken quickly to understand what caused such departures. Rectifying demographic-related attrition is a must because inclusion should be a top goal of every company. Plus, a company can put a halt to the loss of employees of great value and promise. Diversity training can help.

Customer Attrition

While not related to employee attrition, it’s important that a business also be aware of customer attrition.

Customer attrition happens when a company’s customer base begins to shrink. The rate of customer attrition is sometimes referred to as the churn rate. Customer attrition can mean that a company is in trouble and could suffer a loss of revenue.

Customer attrition can take place for a variety of reasons:

• Loyal customers switch their preference to products of another company
• Aging customers aren’t being replaced by younger ones
• Bad customer service
• Changes in product lines
• Failure to update product lines
• Poor product quality

Benefits of Attrition

Attrition has its positive aspects. By its simplest definition, it’s a natural diminishing of the workforce. This can be welcome when the economy is in bad shape or a recession looms and, if not for attrition, a company would face the prospect of having to lay off employees (when it doesn’t want to lose them).

Here are other times when attrition might help:

• If one company acquires another and must deal with redundancies.
• If a company redirects its vision toward a new goal and must restructure or reduce the workforce.
• When new employees are needed to refresh a workplace environment with new ideas and new energy.
• When a company seeks natural opportunities to better diversify a department or division.
• When employees with poor attitudes or performance should be removed to improve workplace culture, reduce costs, or make room for new hires who are a great fit.

The Attrition Rate

The attrition rate is the rate at which people leave a company during a particular period of time. It’s useful for a business to track attrition rates over time so it can see whether departures are increasing or decreasing. A change in the attrition rate can alert management to potential problems within the company that may be causing employee departures.

The formula for the attrition rate is:

Attrition rate = number of departures/average number of employees¹ x 100

Say that 25 employees left ABC Company last year. In addition, the company had an average of 250 employees for the year ((200 + 300)/2).

With those figures, you can now calculate the attrition rate:

Attrition rate = 25/250 x 100

Attrition rate = 0.1 x 100

Attrition rate = 10%

¹ To calculate the average number of employees, add the number that existed at the beginning of the time period to the number that existed at the end of the time period. Then, divide by two.

Why It’s Important to Measure Attrition

By measuring attrition rates, a company may pinpoint problems that are causing voluntary attrition. That’s important because the costs associated with losing valuable employees whom you’d like to retain can be staggering.

For example, the cost to hire and train a new employee when one employee voluntarily departs can be one-half to two times that employee’s annual salary.

Company profits can be affected negatively when knowledgeable, experienced employees leave and productivity suffers.

Loss of customers can go hand in hand with loss of valued employees. That can mean another hit to profits tied to former employees who understood company products and services, and how to sell them.

Attrition vs. Layoffs

Sometimes, employees choose to leave an existing job to take a new one or because they’re retiring. An attrition policy takes advantage of such voluntary departures to reduce overall staff.

Laying off employees doesn’t involve a voluntary action on the part of the employee. However, layoffs do result in attrition when a company doesn’t immediately hire as many new employees as it laid off.

Layoffs occur when a company is faced with a financial crisis and must cut its workforce to stay afloat.

Sometimes, due to changes in company structure or a merger, certain departments are trimmed or eliminated. Rather than relying on natural attrition associated with voluntary employee departures, this usually requires layoffs.

Attrition vs. Turnover

Turnover takes place in a company’s workforce when people leave their job and are replaced by new employees. In such instances, there is no attrition.

Employee turnover is generally counted within a one-year period. This loss of talent occurs in a company for many reasons. As with voluntary attrition, employees may retire, relocate, find a better job, or change their career.

Companies can study turnover to make needed changes. For instance, many employees leaving within a short period of time probably signals issues within a company that must be dealt with.

Just as with voluntary attrition, management can use turnover information to initiate changes that will make the company a more amenable place for new and existing employees.

The Bottom Line

Attrition refers to the gradual but deliberate reduction in staff that occurs as employees leave a company and aren’t replaced.

Employees may leave voluntarily or involuntarily. Or, they may simply move from one department to another. In that case, attrition occurs when the former department doesn’t replace the employee. Employees may also leave for reasons of discrimination.

Calculating and tracking attrition rates can be useful to companies. High attrition rates indicate more people are leaving. They can signal that some problem is causing these departures and must be dealt with to improve the working environment.

Of course, a certain level of attrition can be helpful because it can avoid the need for layoffs in difficult economic times.

What Is Asset/Liability Management?

Asset/liability management is the process of managing the use of assets and cash flows to reduce the firm’s risk of loss from not paying a liability on time. Well-managed assets and liabilities increase business profits. The asset/liability management process is typically applied to bank loan portfolios and pension plans. It also involves the economic value of equity.

Understanding Asset/Liability Management

The concept of asset/liability management focuses on the timing of cash flows because company managers must plan for the payment of liabilities. The process must ensure that assets are available to pay debts as they come due and that assets or earnings can be converted into cash. The asset/liability management process applies to different categories of assets on the balance sheet.

[Important: A company can face a mismatch between assets and liabilities because of illiquidity or changes in interest rates; asset/liability management reduces the likelihood of a mismatch.]

Factoring in Defined Benefit Pension Plans

A defined benefit pension plan provides a fixed, pre-established pension benefit for employees upon retirement, and the employer carries the risk that assets invested in the pension plan may not be sufficient to pay all benefits. Companies must forecast the dollar amount of assets available to pay benefits required by a defined benefit plan.

Assume, for example, that a group of employees must receive a total of $1.5 million in pension payments starting in 10 years. The company must estimate a rate of return on the dollars invested in the pension plan and determine how much the firm must contribute each year before the first payments begin in 10 years.

Examples of Interest Rate Risk

Asset/liability management is also used in banking. A bank must pay interest on deposits and also charge a rate of interest on loans. To manage these two variables, bankers track the net interest margin or the difference between the interest paid on deposits and interest earned on loans.

Assume, for example, that a bank earns an average rate of 6% on three-year loans and pays a 4% rate on three-year certificates of deposit. The interest rate margin the bank generates is 6% – 4% = 2%. Since banks are subject to interest rate risk, or the risk that interest rates increase, clients demand higher interest rates on their deposits to keep assets at the bank.

The Asset Coverage Ratio

An important ratio used in managing assets and liabilities is the asset coverage ratio which computes the value of assets available to pay a firm’s debts. The ratio is calculated as follows:


$\begin{aligned} &\text{Asset Coverage Ratio} = \frac{ ( \text{BVTA} – \text{IA} ) – ( \text{CL} – \text{STDO}) }{ \text{Total Debt Outstanding} } \\ &\textbf{where:} \\ &\text{BVTA} = \text{book value of total assets} \\ &\text{IA} = \text{intangible assets} \\ &\text{CL} = \text{current liabilities} \\ &\text{STDO} = \text{short term debt obligations} \\ \end{aligned}$​Asset Coverage Ratio=Total Debt Outstanding(BVTA−IA)−(CL−STDO)​where:BVTA=book value of total assetsIA=intangible assetsCL=current liabilitiesSTDO=short term debt obligations​

Tangible assets, such as equipment and machinery, are stated at their book value, which is the cost of the asset less accumulated depreciation. Intangible assets, such as patents, are subtracted from the formula because these assets are more difficult to value and sell. Debts payable in less than 12 months are considered short-term debt, and those liabilities are also subtracted from the formula.

The coverage ratio computes the assets available to pay debt obligations, although the liquidation value of some assets, such as real estate, may be difficult to calculate. There is no rule of thumb as to what constitutes a good or poor ratio since calculations vary by industry.

Key Takeaways

• Asset/liability management reduces the risk that a company may not meet its obligations in the future.
• The success of bank loan portfolios and pension plans depend on asset/liability management processes.
• Banks track the difference between the interest paid on deposits and interest earned on loans to ensure that they can pay interest on deposits and to determine what a rate of interest to charge on loans.

[Fast Fact: Asset/liability management is a long-term strategy to manage risks. For example, a home-owner must ensure that they have enough money to pay their mortgage each month by managing their income and expenses for the duration of the loan.]