When I first started my sales and marketing career in 1979, I understood in a general way that my time was valuable. As I got into sales management, obviously, it became even more important. When I started my own small business, again the value ramped up. Throughout all of this time, I never really thought about calculating the value of my time.
Then as a small business consultant, I began to think about everyone's time in my small business clients' companies because the value their time was critical when looking for savings. That's when I learned how to calculate labor burden. I found it fascinating to look at my clients' true costs for their labor.
Let's start with looking at a small business owner's burdened labor to see how much more valuable his or her time is than first thought of. Note: For purposes of this example, I will treat the owner as an employee of the incorporated small business instead of as a sole proprietor.
Value of Small Business Owner's Labor Burdened Rate Is 2.58 Times Salary
This example will assume that the small business owner earns $100,000 per year salary plus a $5,000 Christmas bonus, $1,000 per year for training, $300 per month car allowance, two weeks of vacation, 6 holidays, no medical insurance, some other minor expenses, and 3 hours per day on staff or employee meetings and travel. In addition, I figured his or her efficiency at 90%. What started out at $48.08 average hourly rate on a 40 hour work week ends up costing the company an effective rate of $124.05 per hour.
Labor Burden and Effective Labor Rate
Your burdened labor rate considers all of the costs your small business incurs for your payroll taxes, bonuses, allowances and the like. Effective labor rate adds to your labor burden rate the cost of time paid that yields no obvious benefit.
The effective labor rate alone should be enough to get your attention. My more successful clients seemed to understand this and so delegated as much of the non-revenue producing activities as possible. Nevertheless, I observed many times with small business clients that they were doing the non-revenue producing work themselves.
For many people, it is hard not to micromanage. Some also feel that "if you want something done right, do it yourself." Sometimes too, it is due to fear of having to do something, like management that you are uncomfortable doing. Both these attitudes will cost the business tremendously.
"Opportunity Costs" Are the Value of Missed Opportunities Only You Can Do
As a small business owner, or even a sales person in a small business, your time is far more valuable than the labor burden of your wages because of a concept called "opportunity costs." These are what it costs a company when you miss out on the opportunities only you can do.
When you do anything else, like running to the office supply store or going to the building supply store, you are costing your company way more than the $124.05 per hour burdened labor rate. That is because you are not doing the more valuable activities you could be doing.
Examples of Higher Value Tasks
Some of these opportunities that are most valuable are the following:
- Prospecting for new business
- Selling a large contract
- Handling a disgruntled customer on a major screw up so as to reassure her what is being done to correct this problem and how you will prevent it happening again.
- Inspiring your employees by appreciating them and enabling them to feel positive about their company's value to its customers
- Developing and guiding the company's strategic plans for growth
- Finding talented employees to contribute to the company's dreams
The key thing about respecting the opportunity costs is that your role is to take the long range view by developing solid relationships that will produce customers who stick with you for years to come instead of scrambling for nickels on any little sale you can get now. Find other people and other ways to get those sales too.
What is the highest value use of my time right now?
Ask yourself, "What is the highest value use of my time right now? Remember, though, that
as a small business owner or manager - or sales person-some portion of your month needs to be invested in training because the return on the right training is so high. A solid coaching program exposes you to new ideas, new techniques, and new possibilities. All of these will reap a higher return than their cost provided you act on them.
There are two ways to look at the value of your time as a small business owner: 1) burdened labor rate and 2) opportunity cost. This applies to your executives and sales people too. While your effective labor burden rate is significantly higher than your salary, it pales compared to the cost of opportunities missed that only you can do for your company.
*Note: This was written by a Yahoo! contributor. Do you have a small business story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.
More from this contributor:
- Business Services & Activities