Monday, May 4, 2015

Business planning tip - Calculating payroll costs

When doing financial calculations for a business plan or 1023 application, don't underestimate payroll costs and other government-mandated overhead.

For instance, see the Payroll cost worksheet sample below.

Labor Base Rate (1 employee@ each rate)Wage or Salary/moFICA/SS401K (or other benefits)WC Ins (2.65/$100)SUTA (1.53%)FUTA .06% of $7000Health InsuranceOtherEstimated Hrs/mo
$10.00 $1,600.00 $120.48 $90.00 $42.40 $24.48 $42.00 $100.00 $- 160
$11.00 $880.00 $66.26 $45.00 $23.32 $13.46 $42.00 $- $- 80
$12.00 $1,440.00 $108.43 $67.50 $36.16 $22.03 $42.00 $75.00 $- 120
$13.00 $2,080.00 $156.62 $90.00 $55.12 $31.82 $42.00 $100.00 $- 160
Total annual w/o benefits $72,000.00

Cost/Mo.Annual Total Actual CostPayroll Overhead
$2,019.36 $24,232.32
$1,070.05 $12,840.58
$1,791.12 $21,493.49
$2,555.57 $30,666.82
$89,233.20 $17,233.20

I often see clients disregard these costs, or only include part of them when I review projections for business plans or 1023 applications. The overhead significantly increases the cost of labor. In this example, it is 19.3% of your actual payroll costs.

As a rule of thumb, I generally recommend adding at least 20% to your base wage or salary rate for the first year, and increasing the cost by at least 3-4% for subsequent years to allow for wage or tax increases.

If you fail to account for significant mandated costs it will seriously affect your cash flow, selling price of goods or services and your profit margins. If your target adjusted net profit (profit after all expenses and deductions from income) is in the 5-10% range, you can easily see how you could wind up in the red at the end of the year. Coming up with an extra $1436 every month is significant for any new enterprise.

Nonprofits are particularly prone to disregarding the cash flow realities of being in business.  If your cash flow depends on donations and program-focused grants, you MUST allocate funds separate from most grant funding to pay these relatively non-negotiable costs. Typically, these costs are paid from unrestricted donations, and to know your target amount, you must know your needs.

Don't lowball when it comes to estimating other overhead. I once saw a business plan that allowed $500 for an annual financial audit. After checking with a few accounting firms in the area, the actual cost was between $2500 and $3500.

You do yourself no favors by painting the most optimistic picture of your operation. First, it will leave you scrambling to find the money to pay for all the unaccounted-for costs, and second, investors, lenders or grantors will see right through that fog of optimism.

If your target income or revenue won't cover the actual projected expenses, you may have to adjust the target. Raising your selling price of goods might be an option, or adding contracted income from fees could balance the equation.

And yes, there is a chance that you will discover that your business or nonprofit can't generate enough cash under any scenario to stay afloat.

It's far better to know that now, than discover it after you are already deep in debt.

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