The Entrepreneur"s Guide to Employment Costs
Budgeting - Paying the Troops Spotted attractive businesses for sale, thinking of starting a business? Every day good businesses fail because entrepreneurs fail to estimate the cost of employing their people accurately.
Any good business plan must be based on a real understanding of employment costs.
For some reason or other they - and entrepreneurs are optimists by definition - often underestimate employment costs with disastrous effects.
The most common fault is to focus on the man - or woman - rather than the role.
There is a role to be filled and it takes a person, or persons, to fill it.
Effectiveness To get us started, let's invent a new technical term: effectiveness.
Effectiveness = the number of units paid for divided by the number of units secured.
The units can be anything, dollars, pounds, hours, days provided that you use the same unit on the top and bottom of the division.
For convenience and as an aid memoir we'll use the letter 'E' followed by a second word in brackets to identify the source of the effectiveness so that e(holidays) is the effectiveness resulting from annual holidays etc.
So let's get on with it.
Payroll Effectiveness E(payroll) Depending on where you work and the type of work you do, you will have to insure your employee.
In high risk operations Employer's Liability Insurance may be as much as 7% of basic pay.
e (employers liability) in that case E(insurance) would be 1.
07/1.
00 = 1.
07 Then there may be a payroll tax, in the UK called national insurance which can also be 7-11%.
Taking the highest value E(payroll tax) = 1.
11/1.
00.
There may be other costs where you work! In our case E(payroll) = E(employers liability) * E(payroll tax) = 1.
19 Hourly Effectiveness E(hourly) This reflects the fact that people are not machines and are inconsistent in the way they work.
If you're making widgets and each widget takes an employee five minutes to make, then you will get something less than twelve widgets an hour, say ten.
E(hourly) = 12/10 = 1.
20 Daily Effectiveness e(daily) Depends on how you work, what industry you're in, and how flexible your workforce (and you) are.
9-5 Working In the classic 9-5 work regime you pay for eight hours but get 9-12 then 1-5 ie seven hours so E(lunch) = 8/7 = 1.
14.
Then if you have to offer a continuous service and your staff insist on their breaks, you have to employ someone to stand in during this lunch hour, but if you look carefully this comes to the same factor Long Days If you have to offer your services for more than eight hours a day you may have to pay overtime.
Say you are open ten hours a day and you have to pay time-and-a-half for overtime you will be paying for the ten hours worked plus and additional two half-hours for the overtime.
Ie you pay eleven hours and get ten.
E(long days) = 11/10 = 1.
1 In this simple case E(daily) = E(Lunch) times E(Long Day) = 1.
14*1.
10 = 1.
254 Weekly Effectiveness E(weekly) Now do you work seven days a week or in shifts.
If you do you may have to pay shift allowances or overtime for the weekends.
In the latter case, and paying time and a half for weekend overtime you will get seven day's work but pay for eight with Saturday and Sunday together costing you the equivalent of three days pay.
E(weekly) = (7+1)/7 = 1.
14 Annual Effectiveness E(annual) Normally we have to pay for 260 days (52 weeks by five days/week) but only get about 230 days due to holidays, sickness etc.
Your circumstances may be different: more people go sick from boring work, less when they are totally motivated.
E(annual) is therefore about 260/230 = 1.
13 Overall Effectiveness E Now here comes the shock: these effectiveness measures are not additive - you have to multiply them together! So in our case E = E(payroll)*E(hourly)*E(daily)*E(weekly)*E(annual) That is E = 1.
19*1.
254*1.
14*1.
13 = 1.
99 So, in the specific situation we describe the cost of keeping on person who you pay $10 an hour in place could cost you nearly $20 an hour taken over a year.
Keywords: businesses for sale, estimating, entrepreneur, starting a business, business plan
Any good business plan must be based on a real understanding of employment costs.
For some reason or other they - and entrepreneurs are optimists by definition - often underestimate employment costs with disastrous effects.
The most common fault is to focus on the man - or woman - rather than the role.
There is a role to be filled and it takes a person, or persons, to fill it.
Effectiveness To get us started, let's invent a new technical term: effectiveness.
Effectiveness = the number of units paid for divided by the number of units secured.
The units can be anything, dollars, pounds, hours, days provided that you use the same unit on the top and bottom of the division.
For convenience and as an aid memoir we'll use the letter 'E' followed by a second word in brackets to identify the source of the effectiveness so that e(holidays) is the effectiveness resulting from annual holidays etc.
So let's get on with it.
Payroll Effectiveness E(payroll) Depending on where you work and the type of work you do, you will have to insure your employee.
In high risk operations Employer's Liability Insurance may be as much as 7% of basic pay.
e (employers liability) in that case E(insurance) would be 1.
07/1.
00 = 1.
07 Then there may be a payroll tax, in the UK called national insurance which can also be 7-11%.
Taking the highest value E(payroll tax) = 1.
11/1.
00.
There may be other costs where you work! In our case E(payroll) = E(employers liability) * E(payroll tax) = 1.
19 Hourly Effectiveness E(hourly) This reflects the fact that people are not machines and are inconsistent in the way they work.
If you're making widgets and each widget takes an employee five minutes to make, then you will get something less than twelve widgets an hour, say ten.
E(hourly) = 12/10 = 1.
20 Daily Effectiveness e(daily) Depends on how you work, what industry you're in, and how flexible your workforce (and you) are.
9-5 Working In the classic 9-5 work regime you pay for eight hours but get 9-12 then 1-5 ie seven hours so E(lunch) = 8/7 = 1.
14.
Then if you have to offer a continuous service and your staff insist on their breaks, you have to employ someone to stand in during this lunch hour, but if you look carefully this comes to the same factor Long Days If you have to offer your services for more than eight hours a day you may have to pay overtime.
Say you are open ten hours a day and you have to pay time-and-a-half for overtime you will be paying for the ten hours worked plus and additional two half-hours for the overtime.
Ie you pay eleven hours and get ten.
E(long days) = 11/10 = 1.
1 In this simple case E(daily) = E(Lunch) times E(Long Day) = 1.
14*1.
10 = 1.
254 Weekly Effectiveness E(weekly) Now do you work seven days a week or in shifts.
If you do you may have to pay shift allowances or overtime for the weekends.
In the latter case, and paying time and a half for weekend overtime you will get seven day's work but pay for eight with Saturday and Sunday together costing you the equivalent of three days pay.
E(weekly) = (7+1)/7 = 1.
14 Annual Effectiveness E(annual) Normally we have to pay for 260 days (52 weeks by five days/week) but only get about 230 days due to holidays, sickness etc.
Your circumstances may be different: more people go sick from boring work, less when they are totally motivated.
E(annual) is therefore about 260/230 = 1.
13 Overall Effectiveness E Now here comes the shock: these effectiveness measures are not additive - you have to multiply them together! So in our case E = E(payroll)*E(hourly)*E(daily)*E(weekly)*E(annual) That is E = 1.
19*1.
254*1.
14*1.
13 = 1.
99 So, in the specific situation we describe the cost of keeping on person who you pay $10 an hour in place could cost you nearly $20 an hour taken over a year.
Keywords: businesses for sale, estimating, entrepreneur, starting a business, business plan
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