As a business owner, you may face the decision of whether to use subcontractors or employees to fulfill the needs of your company. While subcontractors offer certain benefits, there may be situations where using employees is necessary or preferable. In this article, we will discuss some principles you need to follow when using employees to ensure profitability and business success.
One of the main downsides of using employees is the difficulty of managing and ensuring your profit margin. When working with subcontractors, you can book a job for a set amount and know that you will make a certain gross profit on the job. Subcontractors are responsible for buying materials and the business owner can use the profits to cover overhead costs, marketing expenses, and more. However, when using employees, you need to aim for a percentage breakdown between labor and materials to ensure profitability.
There are three main costs that you need to manage when using employees:
Labor cost includes the total amount paid to your employees plus their burden, which includes payroll taxes and worker's compensation. You need to ensure that your labor cost comes in at a certain percentage of the total job cost to maintain profitability.
Material cost can easily chip into your profitability if your employees are not efficient with materials and use too much paint, plastic, tape, or paper. You need to manage your material cost and ensure that your labor cost plus your material cost comes in at a certain percentage to maintain profitability.
Lastly, you need to manage your equipment cost, which can be a significant expense if your employees do not take care of the equipment provided by the business owner. It is important to create a reliable system for making sure that your labor costs and material costs stay within budget and that your equipment is properly maintained.
To help incentivize your employees to hit the numbers you want, it is best to not pay them hourly. If you have hours budgeted for a job and you pay your employees hourly, you run the risk of going over budget if they work more hours than expected. This can easily cause you to go over budget on labor costs and eat into your profit margin.
To avoid this, you can provide incentives for your employees to hit the budget by offering bonuses for hitting the target number. This creates a sense of urgency and can motivate your employees to work more efficiently.
By following these principles, you can successfully use employees and maintain profitability in your business.