Do you know what your real people costs are? As accountants, we often miss the real costs of employees. We refer to cost to company and assume that is the real people cost, not taking into account the cost of statutory obligations that the company carries, which are a benefit to the employees over and above the cost to company accountants refer to.
The Basic Conditions of Employment Act requires employers to give employees at least 21 paid annual leave days, 30 sick leave days accrued over a three year employment cycle, 3 day family responsibility leave, 4 months maternity leave with a few concessions for pregnant working women. Furthermore, should an employee leave the employ of the company without using the annual leave, this cost then hits cash-flow as the accrued leave would need to be paid out. These employee benefits are good for business as they create a pleasant working environment as employees are happier knowing they can take time-off to attend to urgent family matters or when their sick without worrying about losing their jobs.
These statutory obligations are a cost of doing business and should be appropriately priced for the company to fully understand its cost structure, especially a small organisation. The issue is, we often sell capacity, for example, service firms would sell available employee time, which come to 252 working days taking into account weekends. However, one still needs to provide for public holidays and leave days, further reducing billable time. Therefore, we only have so much productivity time which translates into revenue hopefully, however our permanent employees’ costs are for a full period (a full year) yet we don’t generate revenue for the full year.
It is difficult to price all variables to fully calculate people cost, however, your accountant should be able to at least generate estimates for your internal budgets and financial projections. This will also assist with provisioning for leave pay. Then as budgets are revised at mid-year or quarterly, when more information is available, then we can adjust for costs that were not realised in the first six months (like sick leave, family responsibility and maternity as those are not paid out). Furthermore, as employees use their annual leave then that is a cost that would not hit cash-flow, however, it does still affect your economic profits.
To calculate the leave costs you could divide your cost to company by expected working days for the said year (say 252), then you get a cost per day. That cost per day would then be multiplied by the allowed leave days as per your company policy. The same should apply for the other expected statutory obligations. In reality, the maternity costs are much higher for companies that use temporary employees to cover employees on maternity leave.
It is easier for established companies to carry the cost, however, for most small companies the costs are so real that if an employee is not at work that is a revenue generating opportunity lost. Often when companies are starved for capacity, they automatically hire without considering the real costs. There are other avenues to fill capacity gaps than permanent hires, like the use of contractors cause then you pay for deliverables or for time spent at work. Ultimately, one should take small leaps towards building a high performance company.
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