Keep Employees Informed of Business Costs
Originally published: 10.01.09 by Ruth King
It will open their eyes to waste and the true value of benefits.
Most hvacr employees think company owners are rich.They know that they make, for example, $20 per hour, and that the hourly rate charged to the customer is $80 or more. They think you are making a killing by collecting the difference! If this is the case at your company, it’s obvious that the employees don’t know the costs associated with running the business.You can and should share the costs of the expenses you pay on the employees’ behalf. Most of them have no clue what it costs you to enable them to do their jobs. How much cost information should you share with employees?
Use these two guidelines:
• Enough for them to understand costs.
• Enough for them to be careful withinventory, materials, and equipment.
In my book, The Ugly Truth about Small Business, I tell the story of an owner who asks everyone during a company meeting, “How would you like to make an extra $20?” Everyone wanted to, of course. He took them to the warehouse outside and showed them the parts and materials that were lying around, ready to be thrown out. He said, “There’s your
Here’s how to show them the costs(see example on page 9):
• Take an average hourly wage. Then add the costs per hour of FICA, Medicare, unemployment taxes, worker’s compensation, health insurance,uniforms, retirement accounts, time off, meetings, and training.
• Then add the hourly truck costs forgas and oil, maintenance and repairs,tools, inventory, insurance,license plates and taxes, radios/cellphones, tolls, and, leasing or interestpayments/depreciation.
For example, take an average hourly wage of $18 per hour. FICA and Medicarecosts are 0.0765 per hour, or $1.38 perhour. Worker’s compensation mightbe $10 per $100 of payroll or 10%. Thehourly cost for an $18-per-hour employee is $1.80 per hour. If health insurance is $95 per month, the hourly cost is $0.55 per hour, assuming 2,080 hours per year. Continue with the hourly costs forall of the expenses that you pay on anemployee’s behalf. In this example, the hourly costs are $41.92. Your employee sees these costs and still assumes that you are making a killing. He forgot two things: One, this assumes that he is productive 100% of thetime and that he bills out 2,000 hours per year, which is impossible in most cases. And two, there are overhead expensesthat must be added.
Here’s where you explain the overhead expenses.
Each employee in the field has to pay a piece of the overhead so that the company can stay in business. Here, list details ofhourly costs for rent, utilities, insurance, answering the telephone, and all of theexpenses that are listed on your profit-and-loss statement. Remember to divide the overhead by the number of field employees. For example, if your rent was $4,000 per month and you had 10 field employees, each would be responsiblefor $400 per month or $2.50 per hour(assuming 160 hours per month).By the time you finish this exercise, thedifference between that $20 hourly wageand hourly rate charged to the customer should be around 10% to 15% ($2 to $3for the $20 hourly wage.) This is a very sobering and eye-opening experience for your employees. They will never again think that “you are making a killing.”
Ruth King has over 25 years of experiencein the hvacr industry and has worked withcontractors, distributors and manufacturersto help grow their companies and tobecome more profitable. She is presidentof HVAC Channel TV and holds a Classll (unrestricted) contractors license inGeorgia. Ruth has authored two booksThe Ugly Truth About Small Business andThe Ugly Truth about Managing People.Contact Ruth at www.hvacchannel.com or770-729-0258.
Articles by Ruth King
Understand Your P&L Statement: Gross Margin
Understand Your P&L Statement: Cost of Goods Sold
However you decide to categorize expenses in your P&L, it's important to be consistent.
Understand Your P&L Statement: Sales vs. Revenue
Sales are critical to survival — when revenue is actually generated is even more critical.
The 20 Percent Profit Myth
For a realistic goal, include owners’ compensation in the net profit equation.
Rethink Your Bonus Strategy
Enact a profit sharing program, rather than a bonus entitlement.