£2 earnt £1 cost
Discussion
A good rule of thumb we work to is each employee should earn the company £100k pa. That's not profit, but revenue. Obviously the higher the number, the higher the profit is likely to be!
One company I worked for it was only £60k. Needless to say they got rid of some high up old wood soon after.
One company I worked for it was only £60k. Needless to say they got rid of some high up old wood soon after.
As Plotty has said, it isn't a hard rule. But it probably isn't far off. The figure I was once given as 'worked out' (for that office) was £20k pa secretarial staff will cost the business £50k pa all in.
Edit to add- most of the £30k difference will be in fixed costs, i.e. one employees share of the office, desks, lighting, power, stationary, and the Xmas party. The rest will be related to their pay as e.g. employers tax, and pension contributions.
So, if we say our £50k was £25k fixed, £20k salary, and £5k related costs, then a £40k 'salary' employee would cost them, maybe £25k fixed, £40k salary, and £10k costs = £75k. Only very rough, but hopefully enough to give an idea or how it works...
Edit to add- most of the £30k difference will be in fixed costs, i.e. one employees share of the office, desks, lighting, power, stationary, and the Xmas party. The rest will be related to their pay as e.g. employers tax, and pension contributions.
So, if we say our £50k was £25k fixed, £20k salary, and £5k related costs, then a £40k 'salary' employee would cost them, maybe £25k fixed, £40k salary, and £10k costs = £75k. Only very rough, but hopefully enough to give an idea or how it works...
Edited by grumbledoak on Monday 19th May 21:52
It's very very dependent on the business.
An efficient manufacturing company may well have one person minding a £500k machine. The running costs and depreciation of the machine will be several times more than the cost of the person running it. Add in plenty of other costs, management, HR, payroll etc and that's before you put an air conditioned building round the machine.
Once you start looking at making integrated circuits then the cost of the wafer fab is measured in £bns and it may still only have a few tens of people working on the production side.
£200,000,000 depreciation a year and a couple of hundred employees means that what you pay them is an almost insignificant part of the costs, Margins are low so you're looking at selling at lot to cover costs, but the world DRAM (standard computer memory) market alone is worth some £32bn a year then it's still possible to make a profit.
An efficient manufacturing company may well have one person minding a £500k machine. The running costs and depreciation of the machine will be several times more than the cost of the person running it. Add in plenty of other costs, management, HR, payroll etc and that's before you put an air conditioned building round the machine.
Once you start looking at making integrated circuits then the cost of the wafer fab is measured in £bns and it may still only have a few tens of people working on the production side.
£200,000,000 depreciation a year and a couple of hundred employees means that what you pay them is an almost insignificant part of the costs, Margins are low so you're looking at selling at lot to cover costs, but the world DRAM (standard computer memory) market alone is worth some £32bn a year then it's still possible to make a profit.
sleep envy said:
cheers guys, as ever not as simple as I first thought - I'm after a junior/admin bod to free up the fee earners
food for thought though, ta
A quick musing.. taking into account the replies of others, would the fixed costs associated with the new employee be almost negligable?food for thought though, ta
If "most of the extra cost is fixed costs" like someone said, then for a new admin role, the total cost will be salary + N.I etc + benefits.
Edited by Stevenj214 on Monday 19th May 22:44
There's so many ways of running the numbers on this. Its a fixed VS variable cost argument and you could ask 20 accountants to work out the cost of employing one extra person and the only time you'd get a consistent answer would be from those that would reply, "what would you like the answer to be."
I take it they need a PC, phone, desk etc. There's depreciation associated with those as well as training costs, extra water used in flushing the loo, extra wear on the carpet etc.
If you want a really accurate cost then I'll happily take on the job, should be able to provide you with a spreadsheet with every possible variable in it that you could adjust to suit your case.
I reckon my fee for the above work will be about £25k for a basic version
I take it they need a PC, phone, desk etc. There's depreciation associated with those as well as training costs, extra water used in flushing the loo, extra wear on the carpet etc.
If you want a really accurate cost then I'll happily take on the job, should be able to provide you with a spreadsheet with every possible variable in it that you could adjust to suit your case.
I reckon my fee for the above work will be about £25k for a basic version
Edited by spikeyhead on Tuesday 20th May 00:14
In the old days (and still in many organisations) before activity based costing, the COSTS of a manufacturing business (heat, rent, management wages, insurance - everything except Direct Labour) was apportioned as an Overhead.
This in Lucas factories of the 80's was typically 250 to 350 %. The more automation, the less labour hours and the more depreciation the higher the %age.
In a lean factory, they would split out product introduction into a separate budget, so the overhead would consume only things required for that product group. Assuming 1 manager for 10 men, plus a maintenance guy and admin and a proportion of HR and training and pensions and NI and the list goes on, the BEST a factory might achive is 1:2 of direct labour cost to Overhead. (And that assume no investment in the future - like owning a car company and just making the same car for years - cash cow I think they call it?)
This in Lucas factories of the 80's was typically 250 to 350 %. The more automation, the less labour hours and the more depreciation the higher the %age.
In a lean factory, they would split out product introduction into a separate budget, so the overhead would consume only things required for that product group. Assuming 1 manager for 10 men, plus a maintenance guy and admin and a proportion of HR and training and pensions and NI and the list goes on, the BEST a factory might achive is 1:2 of direct labour cost to Overhead. (And that assume no investment in the future - like owning a car company and just making the same car for years - cash cow I think they call it?)
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