Companies of all sizes are looking to keep costs as low as possible, cutting superfluous spend, reducing the number of times they buy from within their supply chain, reducing energy consumption, using teleconferencing instead of travelling to meetings, finding cheaper office accommodation, buying second hand equipment and reducing stock levels to an absolute bare minimal.
But business owners, in bad times, look to control runaway costs too early and start making deep cuts. Often these cuts are often too deep and worse still these cuts can have a detrimental impact on their business.
Spend more money!
Entrepreneurs LOVE to spend money, absolutely and categorically LOVE to spend the stuff. Super successful entrepreneurs want to spend more of it each day. You may think that this goes completely against the grain, but when you understand an entrepreneurs’ mindset, I’m sure you’ll look at spending money in a completely different mindset.
The key to spending is to add value. That, right there is the rocket science.
Don’t spend money on something that doesn’t add value to your organisation because customers will not pay you for it and you want get a return on your investment. And that is what a super successful entrepreneur does extremely well, they get above market average returns on investment. They’ll look at their expenditure and only spend on the things that they know will make a difference to their business.
Entrepreneurs only spend money on where that spend will add value.
However, I have seen and continue to see business owners who look to reduce what is often their largest cost and source of added value, their employee costs. More often than not these savings are made when an employee leaves and their replacement hire is paid at a lower cost. To me, this is business suicide.
Many companies understand that losing employee can damage the chances of success but very few can monitor and understand the various financial costs of employee turnover, including cost of recruitment and the impact of lost productivity as new employees are brought up to speed.
So why look at reducing costs by recruiting lower paid employees? Instead why not look at ways to increase the performance and productivity of employees and invest in them?
Why spend money on training and development?
Because the most effective way of reducing the cost of employee turnover in the long run is to take the correct steps to retain and develop talented employees in the first place. And the cost of keeping good employee will far outweigh the cost of employee turnover and savings from lower salaried employees. Do you recall why a business makes a profit on what it does? Because it adds value along the supply chain, so every super successful entrepreneur looks at ways to maximise the value add in their own business.
In many instances this requires a change in corporate culture in which finance and HR practices are aligned with joined up thinking to analyse the effectiveness of the various benefits companies can offer, including flexible working arrangements, additional holidays, pensions, health insurance and income protection etc.
Losing employees is a key risk to success.
Companies have long understood that losing employees is a key risk to success, but very few entrepreneurs study the financial cost of employee turnover.
Research has shown that the loss of an employee earning £25,000 a year or more carries an average financial impact of £30,614. With this cost absorbed and not accurately monitored too many entrepreneurs simply replace lost employees with lower paid employees thinking they are achieving savings of X-Y. Very few entrepreneurs actually know the true cost of employee attrition nor can they measure it, if required to do so.
The costs of losing employees can be split into two main components. Firstly, and most importantly, is the cost of decreased productivity while a new employee gets up to the required standard. Research has demonstrated that this on average is £25,181 for someone recruited earning £20,000.
The second cost, which is probably more familiar, is the cost of finding and absorbing a new employee, which on average is £5,433. This cost includes the cost of advertising, using a recruitment agency, employing a temporary worker, and the cost of interviewing and inducting a new employee.
Of course, new employees that come from the same sector and from all sized businesses get up to optimal productivity on average in 15 weeks. Whereas employees from another sector take 32 weeks and new graduates take 40 weeks. The longest time taken according to studies, are those who come from unemployment and take on average a full year to become fully productive.
Smaller businesses are much better at getting employees to optimal productivity than larger ones – on average company’s with 1-9 employees from within the same sector get up to speed within 12 weeks. The same can take businesses with over 500 employees 18 weeks. So you can see where the most cost is absorbed in getting a new employee up to optimal productivity.
The point?
Simply hiring cheaper employees does not improve the financial performance of a business in the long run. Studies have proven that investment in employee development will yield better returns.
So next time you are looking to reduce costs, don’t start by looking at your most expensive assets, after all, it was an employee who thought of an iPhone, an employee who designed it, and an employee who sold it. Together, those employees made Apple one of the largest corporations in the world. Do you think that Apple employees are paid below the industry average?
Remember what happens if you pay peanuts….