You Can Only Manage What You Measure

For many small and medium–sized businesses (SMB’s), there is a stark disconnect when it comes to truly understanding the cost of product/services.  Specifically, the disconnect comes into play when tracking (or not tracking) labor costs.

Many companies purchase raw materials and/or components, assemble finished goods, and then erroneously determine their costs based on those inputs alone, ignoring the labor factor.  Why?  Because tracking labor is more involved and doesn’t come easy in an SMB’s world of QuickBooks® accounting.  Don’t get me wrong, I absolutely love QuickBooks®, but a workaround is needed to obtain true labor costs that go into finished goods, specific jobs, or services being sold to your customers.

Some programs such as Intuit® payroll will allow you to post time to specific jobs, which is fine, except the fact that the cost factor is incomplete. The cost of an hour of an employee’s time is NOT the hourly wage paid.  The true cost of that hour includes an allocation of payroll taxes, health benefits, training, vacation time, sick time, bench time and other costs.  These indirect costs can increase the total cost per hour significantly.

By example, assume that a worker is paid $15 per hour. Now let’s assume 9% in payroll tax costs, $5,000 in health benefits, and that the employee is entitled to a week of vacation and a week of sick time.  With those factors included, the full cost per hour just went up to $19.50 or 30% higher than thought.  Now consider that even a good worker will only be able to achieve 1,500 productive hours (out of 2,080 total) in a year on average.  With that level of productivity assumed, the cost is now $26.00 per hour, or an alarming 73% higher than the $15 per hour we started at.

Some SMB owners will say, “I invoice my customers based on the prevailing market value of what I provide, irrespective of the sum of my employee’s time charges.  Don’t bother me with time tracking and all of your cost accounting runaround.”  Good for you if you charge your customers/clients based on what the market will bear.  The job is now half done.  You still need to track cost as well, so you know where you are making money.  If you don’t fully understand your labor costs, I guarantee that you will misjudge profitability on specific jobs or lines of business.  You may think you know your costs because of your background, experience, or intuition, but without accurate costing from your accounting/finance team, you are likely wrong in at least some of your conclusions.  Knowing true costs can help you work smarter and more profitably.

So yes, I am advocating time tracking. For many SMB’s, the employees’ time is all that is being sold, or is at least a significant portion of the product cost factor.  So managing a key value driver such as employee time is certainly a worthwhile pursuit. But the naysayer says “tracking a person’s time is a burden and takes away from more productive uses of time.”  Just because something isn’t easy doesn’t mean you don’t do it, and I contend that time spent determining where you make or don’t make money is not unproductive. I fully realize that getting buy-in and compliance from employees who have never tracked their time before is certainly going to be a challenge. So change needs to happen at the top levels of the organization, otherwise a new time tracking system will fail.

A well-run SMB generally needs to have appropriate time tracking software in place in order to facilitate the preparation of payroll, proper accounting for vacation/sick time, and to aid in the determination of costs of product lines, specific jobs, etc.  Each employee should enter their time every day before leaving, as that method captures 25% more productive time than waiting until the end of the week or end of the month.

Sure, you can trim costs by getting a better deal on paper clips at Staples®, or going to a VOIP phone system.  But those costs pale in comparison with employee costs.  There is no quicker way to significantly increase profitability than managing employee time. Put simply, you can’t manage  employee time if you don’t first measure it.