By the Price of Business Show, Hosted by Kevin Price. The Price of Business is a media partner of this site.
You Don’t Have to be Mean to Be in the Black
Which company owner are you?
Company Owner #1 was really liked by his employees. His employees should like him. Employees had no controls over how much work they accomplished and how they spent their time. No one checked time cards or what office employees were really accomplishing. There were no repercussions when employees “didn’t follow the rules.” The business owned the owner. He was working really long hours, had cash flow problems, and a lot of stress! He never took the time to study his financial statements and know the numbers. He was struggling and could never seem to get ahead.
Company Owner #2 was also really liked by his employees. According to his employees, the company was “a great place to work.” The company had goals, profit sharing, and many perks. They had job descriptions and the company managed by those job descriptions. Everyone in the company knew how he or she affected the company’s bottom line – which they shared in. The owner and managers reviewed financial statements each month and knew their numbers.
Both company owners were well liked – but for different reasons. Company #2 attracted productive employees who enjoyed sharing in the profits. Company #1 attracted non-productive employees who wanted to do as little as possible and still collect a paycheck. Company #2 was profitable. Company #1 was not. Company #2 demonstrates that you don’t have to be mean to be in the black!
So what do you do if you are like Company #1? First, find out where you really are. Determine your productivity ratio. Company owner #1’s compensation percentage was frequently over 50%. Company #2’s compensation percentage was always under 30% and frequently under 22%.
What does that mean?
In Company #1, for every dollar they took in the door, they spent at least 50 cents on payroll and payroll taxes. In Company #2, the most they spent on payroll and payroll taxes was 30 cents for every dollar they generated. Where are you?
To calculate this ratio, take each month’s total payroll and divide it by the total sales of that month. Or, if you are departmentalized, and have departmentalized overhead too, you can calculate this percentage by department. If it is over 50%, you may have a problem.
