Value Your Time, Value It Right By James Law

 

I often ask clients what their cost of labour is and what rate they are recharging their labour at. How many of us know the value of our time?

The astonishing reality is that most do not know, or are not analysing this cost properly. Of even greater concern most business people are concerned about charging more for their labour.

I had a manufacturing client in the steel industry that turned over in excess of $5M per annum, and was predicting a turnover for the following financial year in excess of $7M. Logically one would think they were doing well. In reality they were going broke. Will explain why later in this article.

At a variety of levels time is undoubtedly the most important cost and (in many cases) re-charge that any business has!

In what ways does time affect business? Time is labour, and is reflected as the cost of labour in the Profit & Loss. For many businesses, especially in service industries, labour time forms the basis of the businesses revenue charge to clients. It is therefore critical that business properly understands the effect of labour / time on its operations.

Let’s examine some of the issues:

What cost time?

  • Excessive labour is the most common cause of business failure. The underlying cause being a lack of understanding of business process and how to control labour cost.
  • Labour is a primary cost of production. Too much time, makes goods and services too expensive and renders sales uncompetitive.
  • Is labour time correctly allocated as a function of the profit and loss or job cost? If time is not properly analysed within the production and reporting process, its true impact is lost, and business cannot properly understand the impact of times cost on production or on the business generally.
  • What is the construction of labour’s cost? Does your business properly understand the real cost of each person, or unit of labour? Significantly, most businesses don’t.
  • Is each individual’s time measured as a function of production cost?
  • What is the proper relationship (%) of labour as a function of the cost of production, or as a function of job cost? Are your businesses costs in line with these KPI’s? Again the reality is that most businesses don’t know.

Labour as a unit of revenue.

  • Does your business charge time as a unit of revenue or as function of job cost accurately? The simple truth is most businesses don’t. A further reality is that most businesses don’t know how to / are technically ill equipped to do so.
  • If you are a small business, consultant or sole trader are you charging your labour at an appropriate rate thereby ensuring proper labour recovery and profit?
  • Are you concerned that you might lose customers if you charged more? Most businesses are. The reality is that if you have your costs, including labour, at the appropriate level and under control, you should be able to charge them out at a realistic rate.
  • What margin should you charge for your labour? Depends on the industry, but if you cannot make an economic return on your labour, you are better off doing something else.

Remember the client I referred to earlier whose turnover was going to go up 2 million a year but I said they were actually going broke?

I asked them what their cost of labour was, and they told me it was $85 per hour? I asked what they were charging labour out at, and said $82 per hour. I asked why they were doing this and was told they had so much profit in their sales they could afford to do this. I found that clearly was not the case because they were losing money. The way they were measuring their cost of labour was wrong and my concern was that entire analysis of revenue and expense was inaccurate.

 What then are the real problems?

  • Lack of technical knowledge as to how to construct reports and how to measure underlying costs properly.
  • Inability / unwillingness to add a realistic labour margin.
  • Fear of charging labour at its correct rate due to a fear of losing sales.

In reality many businesses go broke for fear of charging their time at its proper rate!

This is a fear. An illogical emotion! If business has its financial fundamentals and KPI’s correctly analysed and under control, business will not go broke charging its time accurately and at the proper rate. If you are unsure, get expert advice!

Value your time and value it right! You may just save your business.

 

James Law:

James has been an accountant for over 30 years, having originally trained with Ernst & Young. He has also owned and run his own businesses in the hospitality and motor vehicle industries. James has a strong business approach due to his unusual mix of backgrounds. He is a financial accountant with a strong background in sales, administration and business change and reengineering. James knows what makes a business work, and enjoys getting greater performance from businesses. James has excellent communication skills and has been responsible for some significant turnarounds and corporate investigations. James rose through the ranks to become CFO of a large listed (ASX) Australian Pharmaceutical company. James has first hand experience running his own hotels as well as experience in MV retailing and car rental, logistics, pharmaceutical and medical supplies, healthcare products and medication management systems, mining and mining services, mechanical services, labour hire, recruitment, and more.

Contact James Law on: james.law@etesiangroup.com.au Or Web: www.etesiangroup.com.au

 

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