Small Business: Analyze Employee Turnover Costs
By: John Rossheim, Monster Senior Contributing Writer
You’re growing your small business and putting in extra effort to expand your workforce. But just when you’ve successfully hired top sales people, your most dependable counter helper jumps ship.
Or what happens when staff at your retail store turns over at an annual rate of 100 percent or 150 percent or even 200 percent? Those costs multiply to a total that can decimate profits and even put your business in jeopardy.
The first step is to assess the real costs of employee turnover and then use this analysis to rationalize your investment in workforce planning. But how can you even begin to enumerate the costs of losing an employee, weathering the vacancy and bringing on a new worker?
“List out all the consequences of a person leaving a specific role, and come up with a dollar figure for each,” says Shebani Patel, a director at Saratoga, the human-resources management practice at PricewaterhouseCoopers.
Delineating Employee Turnover Costs
In the spirit of gauging the magnitude of turnover costs, here are items to consider, with annotations, to put these expenses in context. Put a number on every item that you can and you’ll get an idea of what employee turnover is costing you -- and how much you should put into in workforce planning and retaining your top employees.
Exit costs. Time and resources to hand off projects in progress; customers lost due to sloppy handoffs; unemployment insurance; lost knowledge of your business and industry contacts; final payroll and benefits administration.
It’s easy to dismiss the cost of employee termination, but dangerous to simply hand their worker her last paycheck and show them the door. “Someone has to fill out the paperwork and make sure it’s all done right,” says Johnny Laurent, vice president and general manager for Sage, which sells small-business software. “You might not think about it until you get sued the first time.”
And don’t underestimate the knowledge and relationships that the worker departs with, which can be even more important to a small-business owner than to a middle manager at a large corporation.
Vacancy costs. Loss of productivity; costs of work covered by other employees (including overtime), temps or contractors; client dissatisfaction or loss resulting from any botched handoffs.
Employees are created unequally when it comes to the effect of their absence on your bottom line. “The cost depends on how much the departing employee was involved in bringing in business,” says Jeanne Brutman, a New York financial planner and advisor to small businesses.
And when it comes to the effects of the vacancy on the bottom line, remember to tote up the credits as well as the debits. “Don’t forget your savings from not paying benefits during the vacancy,” says Laurent.
Business owners tend to emphasize “hard costs,” such as those they incur when they pay an invoice for an online job posting. But “soft costs” -- like the time interviewing for retail sales positions with three-digit annual turnover -- can be just as real, and large.
Onboarding costs. Benefits enrollment and other paperwork; training time for new hires and their trainers; reduced productivity of new hire during ramp-up.
The onboarding process is not just about handing the new employee an apron or a shrink-wrapped waste basket filled with office supplies. Getting an employee up to speed can be a substantial cost of doing business.
“If you have to replace someone, it could cost you tons to get the new employee to the point where a rainmaker was,” says Mitch Roop, a consultant to small businesses in Tampa, Fla. And the loss of a good salesperson is as potentially damaging to a cleaning-supplies vendor as to a boutique Wall Street firm.
On the other hand, some changes in your workforce might yield large savings. For example, if you’re able to reset salary to entry level, you could reap big payroll savings from the turnover. And if you hire a younger worker, your health insurance premiums may go down -- but beware of age discrimination.
Granted, many of the costs of employee turnover, while undeniably real, are difficult or impossible to pin down. But don’t let these uncertainties discourage you from calculating what you can and investing proportionately in hiring and retaining great employees.