Published
Articles
Originally
Published in The Business Journal of CNY.
What
an Employee really Costs/Generates
Much has been
written about how much a new hire really costs. So, I'll leave that
to others. I look more at what can an employee generate for me if
properly managed, and assuming I have work (pretty basic
assumptions in today's economy, and basic to all well-run companies).
Specifically with direct labor, where you can generate billing based
on the skills of that employee, take the hourly rate, add on a 40%
ballpark markup for fringes and misc. costs, and you have a cost
close enough to base decisions on. Beyond that, 20 CPA's would give
you 20 different answers. You will get lost in the minutia.
But, what an
employee can generate in revenue is much more important, and more
measurable. If you pay an employee $15 per hour, and throw on another
$6 (40% of $15) for other costs, the ballpark total cost is about
$21 an hour. Now the real question is "What can I bill that hour
for?" (in this example I assume your pay structure is within reason
for your particular business).
The next question
is how good can you manage that employee's time, and can you have
his billable/payroll time match or better the estimated or sold
hours on a consistent basis? The goal is to both charge and bill
every hour paid direct employees. If not, you need to adjust this
formula accordingly. You would be surprised how many clients I now
have whose employees normally work 45-50 billable hours a week or
more. That absorbs even more overhead, and covers any missed downtime.
If you find
direct employees are working too many non-billable hours, you need
to analyze that. This should be automatically tracked by a good
cost system, and specific limits need to be put on allowed, acceptable
non-billed hours. Often this is due to a scheduling problem, lack
of communications (particularly with Sales and Marketing), or poor
planning and pricing decisions. With an analysis right in front
of you explaining where each and every non-billed hour went, what
they were used for, and who is doing it, you must make timely and
well thought out corrections.
Your Operations
Manager must explain all variances from pre-established standards
(agreed to by you and them) and bring the ratios back in line. Hiding
time in non-billed hours while jobs look to have matched or exceeded
estimate in totally counterproductive.
They also must
have access ANYTIME to your on-line job-costing system, so nothing
is a surprise after the fact, when it is too late to correct. Daily,
weekly, or periodic review meetings should cease because the problems
are being addressed when they happen, as they should be! Bad trends
should be stopped before they even become trends; that's the beauty
of a good cost system.
Theoretically,
in this example, anything over $21 an hour generates contribution
dollars (pays some overhead at the very least). A more realistic
$40 an hour generates $19 an hour contribution, or $40,000 a year
in contribution above and beyond his out-of-pocket costs, based
on about 2,000 hours a year. How many more additional employees
contributing $40,000 a year can you bear? It's all in how you
manage your business!
These "windows
of opportunity" of good economic times don't last forever. I also
understand how tough the market is now to hire, but that is the
whole point. You will feel confident about hiring the best you can
find, at a higher price than you thought you could afford. Redundantly,
I remind you of the absurdity of paying a lower priced hire $16
an hour when a $20 an hour might do the same work in ¼ to ¾ of the
time. A real easy decision when you think about it! You need to
seize the opportunity now when there is work, pay for top grade
help, manage it well, and make lots of money.
This philosophy
also helps in your pricing structure and other essential business
judgements. It allows you to take jobs you might otherwise pass
up, not knowing the contribution dollars they will generate. There
are often jobs at less than full price that make total sense to
take, under the right circumstances.
I have found
that by gearing up to a higher employee level, you force yourself
to make more money, because you know that you have to sell their
time, you have to manage them properly, and it expands your capabilities
as a company.
The key to this
whole process is a great job-costing system that tracks all this
information, time in, time out, and matches that time to realistic
estimates and goals. That system tells your managers what is going
wrong immediately and forces them to react immediately. If they
do not, that is where you must intervene. It IS your money.
The key to that
working is a good management team that can react to the feedback
of timely information from the cost system, and make the necessary
adjustments immediately. So you see, in the end, it always comes
back to people and commitment.
This whole philosophy
puts pressure on both the sales and production sides of the company,
to keep pace with each other. Perfect!
You may think
this philosophy is only applicable to manufacturing and a few other
select types of businesses, but think again. It works in a multitude
of businesses.
If the flow
of work keeps coming in because you offer quality, price and service,
and your systems allow you to bring that work to completion on time
and within goals, it becomes a thing of beauty.
Which part are
you missing? I know for a fact that my successful clients have all
cylinders meshing together. It feeds upon itself. It leads to some
very happy endings (and tax problems).
If you are not
there yet, you can, and should be. There is no reason for you not
to be. Which aspect can you not do? Why not? Call me and let me
explain how you can.
Dennis Hoppe is President of Change Management Implementation, Inc. in Brockport, NY. He has been a small business advisor to owners of hundreds of companies since 1989. Visit his web sites at www.dhoppe.com and www.hmcexecutivecoaching.com, or call him at 800-724-3525.
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