Employees: Our Most Important Asset?
As small business owners, we know that employee salaries encompass the lion’s share of the expenses associated with running a business. And many of us at least pay lip service to the motto that our employees “are our most important asset”. Yet, why is it that we don’t manage them like other assets in the business? As a CFO, one of my areas of focus is calculating the ROI (return on investment) for assets companies purchase to operate their businesses. My focus is typically in the area of tangible assets….inventory, plant & equipment, computers, and software, to name a few. With changes occurring in our economy at lightning speed, and rapid movements toward automation which oftentimes means fewer employees, it is critical that we focus on hiring the right employee, train them properly, and keep them engaged. They are the tangible assets that really matter. I love numbers and quantifying many things in business, and if you think of employees as valuable tangible assets, you’ll understand quickly that poor hiring practices often result in high turnover rates, and this equates to even higher costs of running a business. Perhaps, if we really understood the cost of hiring the wrong employee, we might just change our hiring methods and develop a process that encourages better, proactive, and cost-conscious results.
So let’s take a shot at calculating the cost of employee turnover. Here are some of the factors included in calculating the cost:
- Cost of hiring new employee including both direct & indirect….advertising, interviewing, screening, hiring fees paid to professionals
- Cost of on-boarding including training & management time
- Lost productivity…most employees take several months to reach full production capacity
- Lost engagement by other employees…high turnover affects current employees productivity
- Customer service impacts and errors affecting customers
- Negative impact on culture…. “why did they leave?”
As you can see, some of these are intangibles that can be calculated with wide variances from business to business. Let’s just focus on the tangible costs, which we can calculate with reasonable accuracy. There are a number of employee turnover calculators on the internet; I like this one www.staffone.com/resources/turnover-cost-calculator, it’s easy to use and understand. If we look at a probable example, we can see how turnover really affects an organization. Using the online calculator, I’ve listed my assumptions to be for a company with 10 employees; turnover of 1 employee per year making $30,000 in salary. See below:
Employee Salary, Benefits and Turnover
Annual employee salary ($): 30,000
Payroll & benefit costs as percent of salary (%): 27
Number of employees: 10
Annual employee turnover percentage (%): 10
Employee Learning Curve
100% productivity in 3+ months: X
100% productivity in 6+ months:
100% productivity in 12+ months:
New employee training hours: 40
Hourly training cost ($): 25
Other Cost Items
Recruiting cost ($): 500
Signing bonus ($): 15
Number of weeks to fill a job: 4
Number of candidates screened: 5
Your personal hourly wage equivalent ($): 75
The costs associated with replacing this one employee are higher than I originally expected. Results from the calculator show that the tangible cost for the company to replace this one individual would be $11,257, or 37.5% of their annual salary. Imagine if you had turnover of 2 or more employees during the year. Again this doesn’t take into account the intangible costs, including employee morale, overall reduced employee productivity, customer service, owner stress, sleepless nights. Some studies (such as SHMR) predict that every time a business replaces a salaried employee, it costs 6 to 9 months’ salary on average. For a manager making $40,000 a year, that’s $20,000 to $30,000 in recruiting and training expenses!
What we can see is that the cost of employee turnover is significant. Wouldn’t we better off financially and culturally to adopt a comprehensive program of recruitment, hiring, training and engagement to reduce employee turnover? If you’d like help in this area, please contact me and I’ll point you in the right direction to save you time and money.