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What is the true cost of an employee and what does it mean for your business?

What is the most important aspect of your business? If you own a premises, it might be that; if you operate from a truck or car, it might be your vehicle; or it could be your own ideas or special product. No matter what your business is, however, as it grows, you will almost certainly need one key component of any business- an employee. Employee’s help your business grow; they can promote, sell, give you ideas or imagine initiatives, complete administrative tasks, and generally help your business be the best that it can be. But at the same time, employee’s need to be paid: not just wages, but also annual leave and often bonuses, insurance and other benefits.

The true cost of an employee can often be more than what it originally appears; working out whether hiring a new employee will benefit your business or add an unwanted cost is integral to keeping your business running smoothly and healthily.

Does it cost more to hire a new employee or keep an existing employee?

Will I be better off? This question is asked by just about all of us about just about any type of situation. Will I be better off by changing my job? The place where I live? The degree I am completing? And so it continues.

From a business perspective, this question can also be asked in many different ways, one of the most common being: will I be better off by hiring this new employee? From a financial perspective, hiring a new employee and the expenses associated with this such as advertising, time spent on interviews, training, etc. means that hiring a new employee is often more expensive than keeping an existing employee.

Individual situations matter though; perhaps the new employee is immensely talented in a critical area where your business is currently lacking talent, or can work the exact hours that you need filled. In these situations, hiring this new employee can often in the long run be a financial positive, especially if the new employee has skills in areas where existing employees do not. Working out the skills, strengths and weaknesses of current employee’s can be difficult though; timekeeping software can help immensely with this important stage of deciding whether you should hire a new employee or keep an existing one.

When an employees strengths and weaknesses are found you have the information necessary to delegate roles in a way that benefits yourself, your employees, and most importantly your business.

What does the cost of an employee take into account?

The cost of an employee is often far more than just their wages. Employee recruitment and overtime, benefits, insurance, bonuses, and indirect employee costs such as power and utilities used all create costs that will have to be covered by you. In return however you may gain a valuable employee who earns more revenue for your business and allows you to expand further.

Employee Recruitment

It takes time and effort to recruit employees, especially in an economy where many job openings receive hundreds of applications. Even if your business if small, you may find yourself overwhelmed by responses, and this is after the time used to create the perfect advertisement and working out where to place it. Whittling down these applications, interviewing a shortlist of candidates, and working out which of these candidates fits your businesses wants and needs best takes further time and energy. This however is only the first cost of hiring a new employee.

Wages

Undoubtedly the biggest cost of hiring a new employee is their wages. An employee’s main motivation for joining your business may well be these wages; because of this, it can be difficult to work out their exact pay rate so that you may strike a balance between motivating them and keeping their cost relatively low. Even if the work you are offering the prospective employee is unskilled and menial, minimum wage laws must be met and wages must be continually paid, week after week.

Employee Overtime

No matter whether your business is big or small (but perhaps more so if your business is small and just starting out), employees may have to work overtime from time to time. This overtime quickly accumulates; if you’re finding it hard to cover the cost of an employee’s ordinary wages then make sure to keep track of the amount of overtime worked carefully so that you can avoid any nasty surprises. The amount of time an employee works, including their overtime can be best monitored by time tracking software. This software then allows you to make decisions regarding an employee’s work hours easily and effectively.

Employee Benefits

Christmas parties, work functions, company cars, paid mobile plans, discounts; the list of benefits an employee may enjoy seems never-ending. These benefits however can end up costing you quite a bit, especially when they are continuous and offered to several employees. The cost of employee benefits can perhaps be best cut down by offering a variety of benefits to employees, with more recent or lower ranking employees earning less. Whilst this may seem unfair at first, remember that employee benefits are exactly what they are- benefits! Otherwise, think of innovative and relatively cost free benefits; something as simple as having dinner with your employees can be motivating and considered a benefit.

Employee Insurance

As your business grows you may find out that you need to supply your employees with employee insurance. Life and Health coverage is an additional cost for your business that you may need to face; when key employees within your business are injured or unable to work it ensures your business has funds and is able to continue running. However, when everyone is healthy and working, employee insurance ends up being another continual cost to bear in mind.

Bonuses

Nearly everyone loves a bonus! If you’re on the lookout for exceptionally skilled workers then they will probably be accustomed to bonuses being offered to them in their previous roles. Whilst bonuses act as a great employee incentive, they also end up being another cost to you. Think carefully about what bonuses are offered and how big those bonuses are; creating bonuses that incentivize workers to work hard and well can actually pay off!

Indirect Employee Costs

Indirect employee costs are all costs that are commonly associated with overhead. Whilst your goods/service and wages paid to your employees serve as direct costs, indirect costs can include the cost of general materials (such as office supplies), taxes, administration costs and certain types of labour (such as a plumber being called in to fix the office bathroom). As your business grows, these indirect employee costs can grow as well; in the end, it pays to watch these costs carefully, as although they may be individually small when combined these costs can surmount to quite a bit of money.

Employee Theft

23% of all the thefts that occurred in retail/supermarket stores in New Zealand in 2018 were attributed to employee theft. Whilst no one likes to bring up the often tricky subject of employee theft, it is an issue that has to be tackled; just as some of your employees are likely to be extremely honest, hard-working and a real asset to the business, others may use the business to their advantage, using it to give themselves discounts or even directly shoplift. Employee’s can be monitored by making use of time tracking apps, which helps you to spot irregularities in an employee’s work that may lead to a discovery of theft.

How can you calculate the true cost of an employee?

The true cost of an employee can actually be easily calculated. The government of New Zealand offers an employee cost calculator that allows you to fill in fields specifying the industry your business works in, the role type of the employee, and their pay rate and amount of hours worked per week. The calculator can then break down the true cost of the employee, showing you fixed costs, including ACC costs, salary, industry insurance, KiwiSaver, and fringe benefit tax; and discretionary costs, including recruitment costs, setup and training costs, overheads, and employee benefits.

What does this mean, and how can you use it to optimize your business?

When hiring an employee, you will be faced with upfront costs and monthly costs, upfront costs including recruitment and training and monthly costs including salary and superannuation. By filling in the calculators fields specifying role type, salary, etc. correctly you can find the true cost of an employee, and figure out whether you will be better off hiring a new employee or keeping a current one. You can then use this information to optimize your employment policy and save money for you and your business!

What costs should I consider before hiring an employee?

In short, all the costs considered above! Wages, recruitment, overtime, benefits, bonuses, insurance, employee theft and indirect employee costs should all be considered before deciding whether to hire someone or not. Luckily, the employee cost calculator linked to here should allow you to figure out what the majority of these costs will be.

Often, you may find it easier to keep a current employee and train them in a new area rather than trying to find a whole new employee; perhaps just as often, you may find yourself looking for someone with a specific skill set. No matter what road you take, keep the future of the business and your own prosperity in mind and you should find yourself making the right choice!

Finally, remember that hiring a new employee is a big step for you, your business, and the new employee themselves; treat them like part of your work family, nurture them well, and you may well find that you’ve made a worthy investment that ends in a triple win for them, you, and your business!

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