Most of your store personnel are unaware of just how much money it takes to operate your business.
By Mel Kleiman
While your reality may be otherwise, your people probably think you’re rolling in dough simply because you write their paychecks.
On top of that, you own your own business, drive a nice car and take the occasional vacation, right? In other words, they’ve made their conclusion based on what they’ve observed (their perceptions) rather than on reality, which includes all the business factors they don’t see or know about.
There is almost always a gap of some sort between peoples’ perceptions and reality, but none more so than when it comes to money. While it may be true that “money makes the world go around,” almost no one talks about it. So, misperception reigns and may cause your employees to think things like:
1) You’re stingy.
2) Shrinkage or absenteeism won’t make a dent.
3) It’s all about profits and never about people (customers or employees).
Whenever I work with a convenience store client, I always shop a few of their locations myself. Besides asking the cashier what I need to do to apply for a job and whether or not it’s a good place to work, I ask if the job pays well since the company must be making lots of money when a fountain drink goes for 99 cents and a single slice of pizza is $2.99.
BREAKING IT DOWN
The answers I get vary widely, but when I ask what percentage of each dollar in sales they think their location makes after taxes, roughly 90% estimate it’s 50% or more. No wonder these folks all think they’re deserving of healthy raises and better benefit packages.
The reality is, of course, that, as of 2015, the average return for a U.S. c-store was in the 5.5% range and, according to the Yahoo! Finance database for 212 different industries, the average profit margin for the first quarter of 2016 was 7.5% and the median profit margin was 6.5%.
So, if you’d like to eliminate unfounded grumbling, your best bet is to clue your people in and show them where all the money goes.
While you don’t need to share all the details of your P&L, there are a few key employment metrics that will give them a better grasp of the big picture, including:
- Labor Cost as a Percentage of Revenue: This is annual compensation plus benefits and labor taxes divided by annual revenue. For example, if the business paid $50,000 a year in wages and benefits to its employees, and it brought in $500,000 a year in revenue, you would divide $50,000 by $500,000 to get 0.1 or 10%.
If your store has five or six employees and is open 24 hours a day, that is 168 hours for just one employee on duty at a time. If you have two at a time, it is 336 hours and, at just $10 an hour, that comes to a labor cost without benefits of $3,336 per week. At a 10% profit margin, you would have to do $33,360 a week just to cover the payroll cost and this does not include all of the extra payroll expenses.
- Profit Per Employee: This is revenue minus operating expenses divided by the total number of employees. The final number provides an integrated picture of productivity and expense control efforts.
- Revenue Per Employee: This is revenue divided by the number of employees. This formula looks at how much revenue each employee generates and is a basic measure of productivity. This doesn’t have to be an in-depth statistical analysis. If you want to keep it simple, make it a standard part of your orientation program to pass out an illustration of a $1 bill and ask new hires to guesstimate and draw a line representing what percentage of that dollar is profit and which is expense. Then show them the actual breakdown.
One business owner who shares this kind of information recently told me: “When I show employees my $150,000 salary is 5% of sales and that their payroll of $1.2 million is 33% of sales, it sinks in. And when they see that the rest of the profit is only another 5%, they know it’s all fair. When they see numbers on insurance, taxes, utilities, repairs, some of them really get it.”
You might also let your people know that hiring a new employee earning $33,000 a year, for example, has a greater financial impact than taking on a $750,000 mortgage. Employees rarely consider things like this when looking at your business.
While both represent an ongoing outflow of about $2,750 per month, the employee comes with all kinds of added costs, including training, management time, supplies, etc., as well as the fact that the employee’s cost will rise over time.
If you do attempt to correct this common misperception about how much money you and your operation actually make, who knows, it might be just the incentive your employees need to come up with some creative, money-saving and profit-boosting ideas.
Mel Kleiman, CSP, is an internationally known authority on recruiting, selecting, and hiring hourly employees. He has been the president of Humetrics since 1976 and has over 30 years of practical experience, research, consulting and professional speaking work to his credit.
