Tag Archives: Small Business

Understanding the True Cost of An Employee

As a small business owner, you don’t have much margin when it comes to the cost of doing business. The employees you hire are so critical to the success of your business, but how do you decide how much to pay them?

There are many aspects to this decision, but in order to set an hourly (or salaried) rate for an employee you first need to understand the factors that contribute to the overall cost of that employee. Once you understand the true cost of an employee, you’ll be able to use that figure to determine pricing for the services you offer.

Today’s post is brought to you by Marian Ellis, one of our amazing accountants on staff at Joy Accounting. Enjoy!

Why are labor costs important to your business?

One of the decisions that every business owner must make is how much to charge for services.  While there are many factors that impact your rates, the most misunderstood is generally employee labor costs.

While some might think that labor costs are easy to calculate (you pay your employee $20/hour so it must cost you $20/hour) the reality is that the average employee’s true cost can be anywhere from 25-40% higher than their hourly rate.  If you generate estimates for your customers based off an erroneous labor rate, you run the risk of cutting into your profits or, in a worst-case scenario, losing money on customer jobs and projects.

The value of knowing your true labor rate goes beyond client billing.  It is important for business owners and managers to understand the cost of non-billable work (time not spent working directly on customer projects).

It is virtually impossible and likely counter-productive to attempt to eliminate all non-billable time.  Meetings, other administrative tasks, and training are simply a part of doing business.  Knowing the true cost of these activities, however, will help you eliminate the unnecessary tasks and determine alternate value-added tasks to focus on instead. For example, if your employees are engaging in a manual administrative activity every week that adds up to a total true labor cost of $500, you might consider ways of automating that process to reduce costs.  Perhaps an automated solution might cost $300 per week.  If you do not understand your true labor cost, it would be impossible to do an apples-to-apples comparison and make an informed decision.

How to determine your true employee cost

The true employee cost calculation will be different for every business.  There are, however, several elements that you should consider when doing your calculation. Of course, some of these items (i.e. payroll taxes) are fixed, while others (i.e. paid time off) can be set based on your discretion, and your decisions around these discretionary items will cause the true employee cost to fluctuate considerably. The elements to consider are as follows:

  • Payroll Taxes – Federal/State Unemployment, Social Security, Medicare, Workman’s Comp, local payroll taxes, etc.
  • Health Insurance – Employer paid premiums
  • Retirement Benefits – Plan management cost and employer matching contribution on plans such as pensions or 401(k)
  • Paid Time Off – Paid breaks, vacation time, sick leave, paid personal time, paid holidays
  • Overhead – Expenses such as office space, recruiting costs, supplies/tools, administrative costs (recruiting, payroll), uniforms, company paid cell phones, computer equipment, etc.

Knowing how much your employees cost is a requisite of any well-functioning business. As with many accounting and financial concerns, it is highly recommended that you reach out to a professional, such as Joy Accounting Services, for assistance.  Calculating employee costs and streamlining processes to reduce non-billable time are only two of the many skills that we bring to the table to help grow your business.

From Dream to Reality: Our Story of Building a Thriving Small Business

This month marks two and a half years since Joy Accounting was formed. It’s about time we start blogging about our experience and sharing our knowledge, don’t you think? In the coming months, we will be sharing our collective knowledge and individual expertise with you via this blog. Topics we’ll cover will include apps that we utilize that integrate with Quickbooks Online, tips we’ve learned from working with small construction businesses, lessons that we’ve learned from running a small business with remote workers, and much more. We have such a talented accounting team with a diverse skill set and unique backgrounds, and we’re excited to have each of them contribute to the blog and share their knowledge with you.

I’d like to use this first blog post to peel back the layers a bit and tell the real, unfiltered story of the journey we’ve experienced at Joy Accounting, from the first steps of starting a business to where we are today.

The Idea

Three years ago, Terra Joy, my wife, had a realization; over the previous 10 years she had worked in almost every aspect of an accounting department, all the way from starting with basic bookkeeping in college to operating as a Controller in the small construction business that she worked for at that time. Moreover, she focused on construction and trade-related fields during that entire time, meaning that she had a significant amount of expertise in the construction industry (which isn’t necessarily teeming with accountants). However, she was a ‘cog in the wheel’, churning out reports and reconciling accounts – all while dreaming of something more meaningful to her.

With her set of skills and a potential need identified, she told me one evening in Fall 2014 that she wanted to start her own business. She wanted to help small businesses succeed, and didn’t see a path for doing that in the traditional corporate world.

Launching the Business

As with all new ideas, we approached it from all different angles. What would we focus our business on? Where would our clients come from? These questions and more would resurface many times over the next several months as we officially launched our business in February 2015 and started working with our first client in Spring 2015. Who would have thought that our first client would come from a Facebook lead from my mother? That was the first of many surprises along the road!

From the beginning, being a business partner (not ‘just’ a bookkeeper) was a critical component of our vision. Small business owners don’t need someone to check the boxes, they need someone to clarify what areas of their business they can improve, and help them build a plan to get there.

For the first 6 months or so, we were continuing to figure out the direction of our company. Then, in November 2015, it all become clear while hanging out with Oprah at Quickbooks Connect in San Jose. “Hanging out with Oprah” is a bit of a stretch, perhaps, as we were one of 20,000 or so attendees watching her from the crowd. (Her speech was phenomenal, by the way.) But the classes that we attended during that conference really honed our vision and enabled us to understand that we needed to focus on our core competencies as we built our business.

After the conference, we rented a convertible and drove down Highway 1 in California (a must-do if you haven’t) and dreamed about what our business could become. We revamped our goals, and decided that moving forward we would completely focus on building great solutions for small construction businesses. And that’s when Joy Accounting really took off.

Where We’re at Today

In the last two years, we’ve learned a lot about running a small business. Certainly, we wanted to grow, but not at the expense of offering the highest quality service to each of our clients. And grow we have! From our humble beginnings, we now have a team of 5 that are continually striving to meet our clients’ needs and improve their bottom lines.

At the outset, we couldn’t have imagined how much fun it would be to partner with clients and help them define and then achieve their goals. We love working with small businesses because we relate so well to people who take a chance, forego the typical corporate job, and strike out on their own. The ‘Aha’ moments that we experience with clients are priceless. We’ve also seen a difference in many of our clients’ bottom lines, just by helping them identify and tweak specific things to make them more profitable. For example, last year we enabled a client to increase its profitability significantly based on our recommendations.

We have built out a cool, diverse client base and we continue to grow. We are operating as the back-office virtual accounting team for a general contractor. We have clients that specialize in tile, paving, lawn, real estate, and much more. You can see some specific client recommendations if you scroll down on our home page. We treat each new client like a puzzle; how can we help arrange the pieces so that the client utilizes the right combination of technology to focus on the right things and continues to follow through according to their goals.

Let us know if you or anyone you know would like to learn more about our services! Please give us a call at 425.213.4862 or contact us through the contact page on our website.