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/mo	FICA/SS	401K (or other benefits)	WC Ins (2.65/$100)	SUTA (1.53%)	FUTA .06% of $7000	Health Insurance	Other	Estimated 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 Cost	Payroll 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.

The one question that many nonprofits can't answer

That question is…what are your costs?

I do a significant number of business plans and grant applications, and they all require some sort of budget or financial forecasting. For some reason, almost everyone can tell me how much money they think they need for a given program or to start their business. When it comes to filling in the other side, i.e. what costs will that money pay for, less than 50% can provide the information. Added to that is that often they really don't seem to know how to calculate costs. It's almost as though they feel that if they don't think about the costs, they won't have any. If only that were true!

Costs are not just paper plates, postage, and computers. When I ask about things like taxes, the answer is, "We are a nonprofit so we don't pay taxes". Are you sure? What about sales tax, property tax and payroll or self-employment taxes? What about your rent, mortgage and property insurance,  even if your operation is housed in your private home?  If you use your private vehicle in your business or nonprofit, what percentage of its cost of operation can be attributed to business use as transportation costs? Even your internet access fees can be prorated to your operations.

Every single dollar of revenue generates some non-program costs. If you need $5,000 to run a certain program, then you have to know how much of that will truly reach your clients. When you are asked to send in a report on the uses of the funds, it better be accurate.

Donors want to see that you have a grasp on costs and you know where to allocate them. If you don't understand the difference between program costs and administrative costs, there is a good chance that the money the donor thinks is going strictly to programs is actually being used to keep the lights on. Most donors don't like that if they didn't know about it in advance.

Grant applications, loan applications  and business plans always have a section for financial data. Some of them are extremely detailed, while others may just want a total cost figure. Some people try to plug in a number that sounds good, but if pressed for details, they can't provide them. Accurate, detailed financial reporting is important. 

For instance, one grantor followed up on an application with a request for the cost breakdown analysis for a program budget line item. The applicant couldn't provide historical data on the cost to operate a delivery truck, because they had simply never tracked it.

That's why winging it doesn't usually work very well for very long.  More importantly, if you do try to wing it, it is usually pretty obvious to both investors and donors and your funding requests will hit the proverbial round file.

If you aren't sure whether your financial reporting will pass inspection, drop me a line and we'll look it  over together.