What do I mean? Labor, like a hotel room, is perishable.
If a hotel owner does not sell a room today, he has lost because the ability to sell that hotel room that day is gone forever. Tomorrow, he has the opportunity to sell that room again. If he does, he has revenue. If he does not, then he’s lost that ability to earn revenue that day for that room.
Labor is also perishable. If you don’t sell a person’s labor today, then it is lost. You cannot sell that labor tomorrow.
Inventory is different. If you don’t sell it today, it sits in your warehouse or on your truck and you can sell it tomorrow.
Labor that is not sold is gone forever. The unbilled hour or day is irreplaceable.
On average, employees work 40 hours a week or 2080 hours a year. Assuming you deduct for vacation, holidays, meeting time, and training time, you can only sell about 1900 hours a year…about 91% of the employee’s time can be sold, i.e. billed.
How many hours a year per employee do you actually sell?
Your pricing must include the cost for those hours you cannot sell.
Track billable or sold hours against the number of hours you paid an employee. That is your sales or billable percentage.
Let’s assume your billable percentage is 80%. If an employee earns $50 an hour, then he actually costs $50/80% or $62.50 an hour. And, if your overhead cost is $40 per hour, then the $40 an hour also has to be divided by 80% because overhead is based on billable or sold hours.
So the actual break even cost for the employee is $62.50 + $50 ($40/80%) or $112.50.
Make sure you consider the hours you can’t sell in your pricing.
Labor is a precious commodity. Profitably sell all the hours you can sell.
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