The Most Misunderstood Expense in Business
Employee turnover can cut into profits; however, with some preparation, retailers can avoid being impacted before problems arise.
Each year, Gallup releases a report examining how employee engagement affects key performance outcomes across industries. Having engaged employees is a key to success for pet retailers and other businesses. For example, actively disengaged employees drive away customers and eat up a manager’s time and focus—particularly when they inevitably have to be replaced.
Employee turnover is a huge but often overlooked expense for businesses of all kinds and sizes. A study by the Center for American Progress found that the average cost to a company of turning over a highly skilled job is 213 percent of the cost of one year’s compensation for the position.
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:
- Staff Strain While the Position Is Unfilled: The process of recruiting and hiring new 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.
- Learning Curve Effects on Profitability: The amount of time it takes the new employee to get through the normal learning curve can take weeks or months. During that time, there is a tremendous gap in productivity versus compensation and a serious negative leverage working on the profitability of the company.
- Training Demands: Training new employees has both direct and indirect effects on current staff. It directly reduces the time available for existing staff members who are training new recruits to respond to normal operating issues. Plus, the need to cover gaps in efficiency caused by the learning curve of new employees indirectly affects the performance and morale of other staff. Existing staff members might be unable to complete their own tasks on time while covering requirements of the newly staffed position.
Each time these situations occur, it causes significant stress on the organization. And the smaller the company, the more stress is felt. In smaller companies, having a single position unfilled can have a dramatic impact because there are not as many other employees to fill the gap.
What’s the solution? Retailers should give serious consideration to employee retention and its relationship to overall payroll costs. This is particularly true in fast-growing sectors such as pet specialty retail, where customer service is such a key factor in success.
One way to do this is to make sure your employees have adequate training to do their jobs. Even though training can be time consuming and expensive, it is important to ensure that each employee is performing at the highest level of efficiency and effectiveness. A staff that is equipped with the appropriate skills and the necessary tools to perform is essential to the profitability of your business.
More extensive experience or better training results in a higher level of performance. This justifies a higher pay rate for employees (new hires or existing staff) who are better trained and more experienced. The overall advantage 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. Remember:
- 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.
- Avoiding overtime by managing the effective use of available regular-time hours can produce great returns. Pay attention to scheduling and absenteeism to reduce the need for extended hours for full-time staff.
- By managing staffing levels, you can avoid the need to manage the details of many associated costs while reaping the same benefits on the bottom line.
Regardless of how many people your business employs, if you have employees, you will have to address these issues on some level. Your decisions regarding training, staffing levels and compensation will affect your company well into the future, so it pays to think through the ramifications. Get professional help where you need it and follow the experts’ advice.
Fred Parrish is the founder and CEO of The Profit Experts, a 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. Parrish is also the author of “The Profit Mentality.” For more information, visit theprofitbeacon.com.