We’ve got to get organized here!
Okay, admittedly, that was a pun.
I’m not proposing that we organize a labor strike, but rather, that we quantify our firm’s labor.
We’re interested in labor dollar signs, not protest signs.
“Labor” is such an unglamorous word for the creative and unpredictable process that goes on in most firms. Let’s call that design.
What we mean when we talk about Labor in our firms is its cost.
We may also hear it referred to as “payroll,” but that can sometimes be interpreted to mean a past month’s payroll.
Sure, our accountants or bookkeepers know what our payroll looks like for a given month– in the past.
But ask them what our payroll will be in 6 months, and they may give us a blank stare. They are not likely to know what changes are anticipated in our staffing, our salaries, or other strategic directions.
As I’ve said before, accounting looks at the past. It does not predict anything.
But, that’s exactly what we need to do. Predict our Labor cost.
You will recall that we discussed how to predict our ongoing profitability by forecasting the three components of a simple formula. Most recently, we talked about how to forecast revenues. Now, let’s look at forecasting our Labor costs.
It’s quite simple. And many of you probably already do something of this nature, as part of an annual budgeting process.
Simply put, we identify ALL of our staff– whether full-time, part-time, contract workers, summer interns, or whatever– and quantify each individual’s monthly compensation.
It’s a snap. We know who they are and what they make.
Here is what we are striving for:
Every month, we’ll get another chance to update our predictions. And in fact, we must do this as part of our ongoing profitability forecasting. Every month. Remember that obsolescence is the enemy of good forecasting.
Another powerful way to use this Labor forecast tool is in predicting our Direct and Indirect Labor, which we must do if we also wish to forecast our Overhead. A topic for another time.
We can even forecast next year’s labor costs, and factor in raises, cost of living increases, staff additions or departures. It may change (and probably will) before next year, but we at least have a pretty good baseline prediction.
Okay, let’s get out there and organize!