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The Most Misunderstood Expense in Business

expense report 1Your success in business depends in large part on your ability to maximize profits while keeping costs under control. One often overlooked cost area is employee turnover. The average cost to a company of turning over a highly skilled job is 213% of the cost of one year’s compensation for the position, the Center for American Progress found.


In addition to the direct cost of hiring and training new staff, there’s also the financial impact of lost efficiency and the stress on current employees during recruiting and training. These include:

1. Staff Strain While the Position is Unfilled: The process of recruiting and hiring replacement staff can take weeks or even months. Until it is finished, existing staff must provide support to complete tasks required of the vacant position while meeting requirements of their own positions.  

2. Learning Curve Effects on Profitability: The amount of time it takes the new employee to get through the normal learning curve can also take weeks or months. During that time there is a tremendous gap in productivity vs. compensation and a serious negative leverage working on the profitability of the company.  

3. Training Demands: Training new employees has both a direct and an indirect effect on current staff members. It directly reduces the time available for existing staff involved in training to respond to normal operating issues. Also, the need to cover gaps in efficiency caused by the learning curve indirectly affects the performance and morale of other staff. Existing staff members may be unable to complete their own tasks on time while covering requirements of the newly staffed position.  

Each time these situations occur, the stress on the organization is significant. The effects are more severe in smaller organizations where the absence of one individual can have a dramatic impact on overall staffing as there are not as many other employees to cover gaps in efficiency.

These issues can have far reaching effects on the entire organization, so companies should give serious consideration to retaining staff and the relationship to overall payroll costs.

Even though training existing staff is expensive, it is important to ensure that each employee is performing at the highest level of efficiency and effectiveness. A staff that is well equipped with the appropriate skills and given the necessary tools to perform is essential to operating a profitable company.

This need even justifies a higher pay rate for employees (new hires or existing staff) with more extensive experience or better training resulting in a higher level of performance. The overall benefit of a superior staff far exceeds the premium paid in the form of higher salary and/or better benefits.

There are numerous areas directly related to staffing management that provide opportunities for improved profits beyond the relatively simple decision regarding base compensation. These vary from company to company, but at some point they must be managed. Keep in mind:

  • Payroll is a major area of management focus for controlling operating expenses in most businesses. Managing staff efficiency is crucial to the success of the organization.

  • In addition to the obvious cost (salaries), there are “hidden” costs that are not so well understood and can add a significant premium to the base number such as payroll taxes, worker’s compensation insurance, group health and other benefits, etc.

  • By managing staffing levels you avoid the need to manage the details of those many associated costs while reaping the same benefits on the bottom line.

If you have employees you will have to address these issues on some level. Your decisions will affect the company well into the future, so it pays big dividends to think through the ramifications. Get professional help where you need it and follow the experts’ advice.


About the Author: Fred Parrish is Founder and Chief Executive Officer of The Profit Experts™, an affordable CFO service that helps small business owners improve their profitability and cash flow. He is also creator of The Profit Beacon™, a new app that provides predictive analytics to help businesses make smart and timely decisions, and author of “The Profit Mentality.” During a 37-year career, Fred has held positions from staff accountant to CEO in public and private companies with revenues ranging from startup to $3.5 billion. He’s served on the boards of directors for 12 organizations in aerospace, manufacturing, healthcare services, insurance, international missions, technology and other sectors. Small businesses from restaurants to plumbers to manufacturers have survived and thrived with expertise from Fred and The Profit Experts. He is co-writing a book with Michael E. Gerber, author of the E-Myth series, known as the World’s #1 Small Business Guru. For more information please visit www.TheProfitBeacon.com.


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