Using HR To Increase Profits Part 2
In my last blog, I talked about increasing revenue and gaining market share by driving profitability through HR (employees). Today I’ll dig further and show you actual examples using simple math.
Profits are shrinking. The cost of replacing people is rising. Finding the “right talent” is difficult. And the cost of doing business continues to outpace revenues, causing Profit Margins to narrow. There may be a simple solution and it has been proven time again…
Eliminate your Human Resources Department and build an Employee Development Team.
OK, it may be semantics but HR has been evolving for many years now and it is time for small business owners to hear some truth about their traditional HR structure.
Being satisfied that you have an HR department that handles everything may be giving you a false sense of control and security. This may be an unpopular opinion, but if your HR department is shuffling employee paperwork, managing benefits, and has their hand in processing payroll, and drafting employee manuals, or perhaps focused on other aspects of employment that are not related to your service or product, you may be overlooking the single most important, solid, profit margin building aspect of having an HR professional in your business.
Start focusing your HR (employees) on the activities in your business that directly help build profitability!
Because human resources (employees) impact at least five different areas of a business’s P&L we believe it is important to provide the expertise and the resources to help businesses Owners dramatically reduce the time and efforts their own employees are spending on the things an employer must do to stay in business. These are the things that if done wrong can negatively impact profits and if done right can positively impact profits and get employees to refocus on the areas that produce revenue for the owner: Sales, customer service, wealth management, innovation, productivity, developing employees, etc.
This is where the HR Outsourcing industry comes in. Administration costs are killing you, but if we look at focusing our HR department more as an Employee Development Team and nix the administration, we see a positive overall impact.
Let’s take a quick look at the Formula for success in business by PEO expert Rob Blunt at PEO Consulting Group, Inc.
Let’s say HR services are going to be a net cost of $20,000 for a company. (That’s after all the other savings or cost increases brought to you.) And the company operates on an 8% net profit margin, with labor costs of 29.53% of revenue and other nonlabor Costs of Goods Sold and G&A of 62.47% of Revenue.
If the employees were ‘at capacity’ work-level-wise, they’d need to increase revenue by $250,000 to net the $20,000 to cover the cost of the investment for the service.
However, if the employees were NOT ‘at capacity’, and the work associated $250,000 of new revenue could be handled without additional labor cost, then the Net Profit on the same incremental revenue is $93,825.
Subtract off the $20,000 extra cost of your service, and you’re still up by $73,000.
The math is solid. Still think you are saving $$ by doing it yourself? Not to mention the increased revenue caused by focusing on being more tuned into the customer or a prospect.
Simply adding more sales can no doubt increase profits, but reducing G&A and nonvalue ad labor expenses can more effectively increase profit margins. Higher profit margins give businesses the long-term capital leverage they need to innovate and invest in the value add, revenue-driving, activities a business must master to be competitive in their industry.
Lean principles realize there are things that are value add and nonvalue add things that businesses do every day with the primary challenge being minimize or eliminating necessary nonvalue added activities and allocating their own resources to focus on value-added (profit-driving) activities.
The most challenging areas to reduce efforts in are the necessary non-value-added tasks a business must do simply because they have people. There is one goal most business owners want to achieve in this area and that is get as much of the necessary nonvalue added activities off the plate of the business as possible. The business simply does not have to waste time, effort and money on finding ways to reduce nonvalue added and can instead focus on the value-added. Things that help the business owner make more money and spend more time doing the things they enjoy most with peace of mind.
Please leave a comment below. If you would like to discuss how AHEAD HR can help you save time and money by using a development team call (920) 436-9887 or email email@example.com