Knowing Your Wage Costs

Knowing the true cost of each employee is an important factor to making good business decisions.

More importantly, as costs change those additional costs need to be passed on to your customers, either through increasing charge out rates for service or increased margins for retailers.

Adding the costs – An employee costs more than just the hourly rate. When staff take leave there is a cost associated with that. Often businesses accrue leave owing into management reports to get a better picture of the cost. In addition to holiday leave of 20 days a year we also have 11 statutory days and 10 sick days to factor in.

Other Costs – Most employees are now in Kiwisaver so the employer contribution needs to be included. ACC costs can be included, although these can be covered in the overheads as discussed below. Some employers also provide other benefits such as subsidised health insurance, car parks or other benefits, if these have a cost to the business they should also be included.

Hourly Rate $23.00

ACC levies 5% (varies) $ 1.15

Annual Leave 8% $ 1.84

Stat Days 4.2% $ 0.97

Sick Days 4% $ 0.92

Kiwisaver 3% $ 0.80

Total Cost per hour $28.68

Charge out rates – If you operate a trade or service type business where you charge customers on an hourly rate, then there are a few more items to factor in to get to a charge out rate.

Overheads need to be included. To work this out we sum up all the business overhead costs such as vehicles, rents, administration, depreciation (as an allowance for asset replacement), interest etc. ACC can be included in overheads if not already in the cost per hour. You also need to know total amount of hours billed out, sometimes this is a best guess or based on prior year figures. Divide the total overheads by expected hours to get an overhead rate per hour.

Unproductive time – Your team will have unproductive time, even in the most efficient run business there will tend to always be some time that can not be charged to a customer. This can range from 5-20% and needs to be factored in.

Profit – knowing your costs are great, but we aren’t here to just break even. It is important profit margin is enough to make all the hard work worthwhile and also provide a buffer for those unforeseen risks that inadvertently come along.