An important element of a company’s profitability is their payroll expense. It is vital that a business owner realize the full cost of an employee, especially when considering adding to staff. Some examples of these costs, in addition to regular pay and any any potential overtime, are: benefits such as health and/or life insurance, holiday and/or vacation pay, training, hiring costs, etc. These are just a few of the additional costs that should be factored in when budgeting, whether it be with current staff or for the addition of new staff. Each employee should be calculated and matched to their value to the company.
The best way to ensure this is in the budget process. List all costs associated with an employee so that these costs can be accumulated. Often, on a Profit & Loss Statement, costs can be designated in different areas such as Labor is seen in Cost of Goods Sold, Payroll Taxes and Training in Sales & Adminsitration Costs. This does not allow an owner to see a complete picture of employee costs. Understanding the true cost of an employee should be a critical component of the decision to retain or hire employees. This review of employee costs will really will open the eyes of a business owner. And just as importantly, employee retention will lower the cost of employees because it can cost between 1to 5 times the annual pay of an employee to replace them. Wow, that is significant!
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