Why don’t small businesses measure their employee costs? Largely, it is because they don’t understand the formulae to use. Then there is the time required to analyse the data and make more effective decisions using it. Employees are often a ‘means to an end’, a mystery and time consuming frustration for employers.
The best way to look at your costs is to use a spreadsheet. I have listed the formulae below for your reference. Remember ‘knowledge is power.’
Unmanaged attrition (resignations): Total number of resignations in a financial year / Number of employees x 100 = Unmanaged attrition rate
Managed attrition (exits you actively manage): Total number of terminations in a financial year / Number of employees x 100 = Managed attrition rate
Your total attrition will be the combined total: Total number of resignations and terminations in a financial year /Number of employees x 100 = Attrition rate
A cost that businesses tend to underestimate (or lack an understanding of) is the cost of an unfilled vacancy. This can be calculated by using the loss of utilisation formula for a specific role: Base Salary / Number of working days = Day rate & then Day rate x Number of vacant days = Vacancy cost rate
Every employee that you lose and need to replace costs your business money. The rule of thumb calculation for the cost of replacing an employee is a mark-up on their salary of 50% – 150%. For more junior roles this would be closer to the 50% mark up. Salary + [salary x (mark up %)] = Total cost to hire
This calculation includes both hard and soft costs such as advertising, recruitment agencies, lost opportunity, lost time in productivity, training and time for the new employee to become fully productive in the role.
Annual leave costs
You can calculate annual leave costs by using the following approach: Total annual leave accrued across all employees = Total annual leave liability
Absenteeism can be very expensive for businesses, especially if it becomes excessive. To calculate this use: Average day rate salary x number of employees x number of days = Total cost of absenteeism
Loss of utilisation
The best way to calculate this is to start with your business’s average salary. The way to calculate this is to add all of your salaries and divide the total by the number of employees that you have. Total payroll / Number of employees = Average salary
Another way of calculating this cost is understand, for example, how many units are produced across the business.
Number of units / Number of employees = Number of units produced per employee
At a company-wide level, a common calculation to measure productivity is the total revenue produced divided by the number of full-time equivalents, otherwise known as FTEs. FTEs are calculated by adding the total number of hours worked across the business (including part-timers) then dividing the total by 38 hours. Typically profit is not used for this calculation as that number can jump around a bit.
Revenue / FTEs = Productivity
I believe as you start to play around with some of the formulae above and get some answers you will be amazed with the powerful information at your finger tips. I would go as far as to say that, this will bring your business an incredible competitive advantage.