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Attrition



Definition

In finance, attrition refers to the gradual but deliberate reduction of asset value through depreciation, write-offs, or disposals. It can also represent the loss of customers or clients over time in a business. Furthermore, in a competitive business environment, high attrition rates may indicate customer dissatisfaction or high competition.

Phonetic

The phonetic pronunciation of “Attrition” is: /əˈtrɪʃn/.

Key Takeaways

  1. Attrition is the process over time where a company’s workforce shrinks due to employees leaving and not being replaced. It can be voluntary, like retirement or job change, or involuntary, such as layoffs or termination.
  2. Higher attrition rates can indicate problems within the organization, such as poor job satisfaction, low pay, or lack of opportunity for advancement. It can lead to decreased productivity, increased training costs, and a loss of company knowledge and expertise.
  3. Effective methods for managing attrition include implementing employee retention strategies, providing competitive remuneration packages, and creating a positive and empowering work environment.

Importance

Attrition is significant in business and finance as it refers to the gradual reduction of a company’s workforce due to employee’s voluntary departure, retirements or eliminations, and not through layoffs or terminations. High attrition rates can reflect negatively on a company indicating possible issues such as poor workplace environment, inadequate compensation, or inefficient management practices. It is crucial for companies to monitor and manage attrition rates to minimize disruption in operations, maintain productivity, and reduce expenses associated with hiring and training new employees. Moreover, understanding attrition patterns can aid in identifying areas for improvement and strategies for talent retention, contributing to the overall growth and profitability of the organization.

Explanation

Attrition, in the context of finance and business, often refers to the gradual but deliberate reduction in the workforce that occurs when employees leave the company for various reasons, such as retirement or resignation, and are not replaced. This strategy is often employed when a company is looking to cut costs, restructure, or improve efficiency. The method is considered more employee-friendly compared to layoffs or firings, as it doesn’t involve forced terminations. Attrition can help a business get leaner and reduce expenditures, particularly those related to labor, which is commonly a significant cost. The purpose of utilizing an attrition strategy is dual: economic and structural. Economically, attrition can contribute to controlling labor costs by not replacing every departing staff member, or potentially replacing them with lower-cost employees. This tactic can be beneficial during periods of economic downturn or slow growth when companies are under pressure to become more cost-efficient. Structurally, attrition can help with realigning staff and resources, enhancing productivity, and streamlining business processes. From a strategic perspective, it allows an organization to reshape their workforce in response to market changes, advancing technologies or shifts in business strategy without resorting to layoffs, thereby maintaining higher levels of employee morale and loyalty. Despite its benefits, care should be taken when using this strategy as excessive workloads from understaffing can lead to further talent loss, and knowledge gaps can occur if lost employees are not properly replaced.

Examples

1. Employee Attrition: Companies often experience attrition as employees retire, resign or are terminated. For example, a big corporation like Microsoft might lose a certain percentage of their workforce each year due to various reasons such as retirement, job changes, layoffs, or other personal reasons. This is a common example of attrition which not only affects the company’s workforce but also results in significant financial implications as the cost of hiring and training new employees is high. 2. Customer Attrition: A typical example can be seen in the telecom industry. Let’s consider AT&T as an example. Over time, some AT&T customers switch to other service providers for various reasons such as better deals, better service, dissatisfaction with current service, etc. The rate at which AT&T loses its customers to competitors is known as the customer attrition rate. 3. Bank Account Attrition: Banks often experience account attrition when customers close their accounts. For example, Bank of America might see a decrease in the number of active accounts due to dissatisfied customers, people switching to different banks, or due to mortality among older customers. The bank needs to constantly add new accounts to balance this attrition. High attrition rates can negatively affect the bank’s financial health and customer base.

Frequently Asked Questions(FAQ)

What is attrition in finance and business terms?
Attrition in finance and business refers to the gradual reduction of a company’s workforce due to retirement, resignation, or employee termination. It’s a natural course of loss of personnel, often used for calculating business costs and profit margins.
How does attrition affect a company’s profitability?
When a company experiences high attrition, it might need to invest more resources in recruitment, training, and development, which could negatively affect profitability. Conversely, managed attrition can contribute to efficiency as the company maintains only those employees who add significant value to the business.
Is attrition always negative for a business?
Not necessarily. Although higher rates of attrition could indicate issues like poor working conditions, lower job satisfaction, or better options elsewhere, a moderate amount of attrition can facilitate bringing in new talent and ideas, replacing underperforming employees, and managing costs.
What is the formula for calculating attrition rate?
The attrition rate can be calculated by dividing the number of employees who left the company in a given period by the average number of employees during that period, then multiplying the result by 100. The final figure represents the attrition rate as a percentage.
What strategies can businesses implement to manage attrition?
Businesses can manage attrition using strategies such as providing competitive compensation packages, promoting a healthy work culture, creating clear career paths, regularly monitoring employee satisfaction, and implementing retention strategies.
How does employee attrition differ from churn?
While both refer to a type of loss, employee attrition specifically applies to loss of personnel in a company. In contrast, churn refers to the proportion of contractual customers or subscribers who leave a supplier during a given time period.
What is meant by voluntary and involuntary attrition?
Voluntary attrition refers to situations where employees leave a company by their own choice. Involuntary attrition, on the other hand, refers to employees being terminated or laid off by the company.
How does the concept of attrition apply to customer base?
Similar to employee attrition, customer attrition refers to the loss of clients or customers. For example, when customers stop buying or using a company’s products or services, it leads to customer attrition, which can dramatically impact the company’s revenues and profit margins.

Related Finance Terms

  • Churn Rate
  • Customer Retention
  • Employee Turnover
  • Customer Loyalty
  • Business Sustainability

Sources for More Information


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