Why thinking of your employees costs as a sunk cost is costing you more than you think.
When a new financial year arrives, for many small business owners, the ghosts from A Christmas Carol seem to live on in relation to your employees. As you finalised your EOFY reporting for the past year, like most small business owners, you probably saw between 35 and 50% of your total costs being associated with employees. And that’s if it has been a year free of problems!
If any of you have had hassles with staff making allegations (proven or not) or had disputes when someone has left, you will also have legal costs. And these will be aligned with the more usual costs of wages, superannuation, insurances, payroll tax and associated on-costs.
It’s no wonder that many business owners are asking themselves: “Is it worth having staff?”
The answer is an emphatic YES! If you want your business to grow, then employees, rather than contractors, will be an essential ingredient for success. You may need to review the financials; and also reconsider how you look at this significant employees costs line.
The Typical Equipment Investment Scenario
Let’s consider this familiar scenario:
- You have planned growth and have purchased a $500,000 piece of equipment. That is a significant cost and a significant investment in your business operations.
- On delivery, you inspect the equipment closely to ensure that it matches your specifications, what you bought.
- Once in place, you ensure that its operators have the right skills; you train them as applicable; and you ensure that accredited people and businesses service and maintain your equipment.
- You view that equipment as an asset. So you also monitor its performance closely to garantee that it keeps delivering according to the sales pitch.
- You track your equipment’s maintenance costs and down time as part of a plan to maximise its working life.
You Can View Your Employees Costs As An Investment Too
Of course I’m not saying that people are the same as equipment; a machine usually has fewer inputs and factors that affect its performance than staff do! Let’s face it: what happens outside the workplace affects everyone at work (including you) at times. A fight with a spouse. An injury incurred while playing sport…
The point to note is this:
As you’ll agree, we tend to view money spent on equipment as an investment; so we look after it to maximise the positive return on that investment.
We also tend to view money spent on staff as a cost. A sunk cost. A compulsory expense with limited potential for return. We don’t have to, and should not, think this way about employees costs.
4 Ways To Get A High Return On People Costs
- When you treat your employees costs as an investment, it encourages you to set clear expectations of what is reasonable performance to expect from that investment.
Note the emphasis on the words clear and reasonable in terms of expectations. You know you cannot expect to run a piece of equipment 24/7 at 100% capacity for 365 days per year. (If you can, please get in touch as there is a big demand for that type of machinery!).
- Ensure that skilled people manage your staff.
Thinnk of it as you do about the technical skills necessary to maintain expensive equipment: Leadership and people management skills do not come naturally or without training and support. Investing in developing the skills of your managers and supervisors is like investing in quality maintenance of your expensive equipment.
- Plan ahead and budget for staff development and training costs.
Make sure that training that you partly or fully fund is relevant to the business; and be clear on what results/outcomes/changes you expect within the business.
- Plan ahead for the new financial year in terms of new skills and roles that you may need to bring or develop in your business.
Clarify the specifications you have for the skills and the experience that you want in your business. Get good quality advice and expert assistance when preparing the specifications and the advertising (or equipment tender) process.
Finding The Smartest Way To Optimise Outcomes
Adding a new employee to your business is even more complicated than adding a new piece of equipment! And it has a lot more subtle impact and “ripple effect” than often anticipated.
Investing in new technology and new equipment is a decision that you rarely take alone. Consider hiring and managing your staff in the same way and your business can only benefit.
Feel free to contact me to discuss smart ways of optimising your investment in your employees costs in your business.