I would urge every reader to go back and pull out at least three years’ worth of year-end financial statements and examine some of the key ratios such as payroll costs, cost of goods, and overhead expenses.
• What ratios have changed and what brought about those changes?
• Could some of these changes have been averted or limited in their impact or scope?
• Can anything be done now to reverse or improve some of these trends?
One last thing—be very, very cautious of accepting advice from folks who, for the most part, have never owned their own small business. As we know, it is a different world down here in the trenches. It ticks me off to no end to read comments by folks who have never had to make a payroll themselves or wonder where the money was going to come from to pay the business property taxes that are due next month. People who work for others shouldn’t be giving advice to people who work for themselves.
Bigger Problems than Healthcare
OK, let’s return to the initial allegation that rising healthcare costs are responsible for so much of our current misery. Yes, healthcare costs represent a significant cost of doing business and these costs have been going up dramatically the past decade or more. But to suggest that healthcare costs are a primary cause of the decline in profitability in our industry is playing to our emotions, not to the facts at hand.
I just finished running some basic numbers and even a 15-20% increase in healthcare premiums between 2010 and 2011 (10 times the average rate of inflation) for a 40-year-old employee being paid $20 per hour translates to a total increase in payroll costs of approximately 1%.
Do I like that increase? Of course not, but if you look at the bigger picture and closely examine both of the charts within this article, it is quite apparent that we have a much bigger problem on our hands than just increasing healthcare costs. Like it or not, rising healthcare costs were not the primary cause of the dramatic increases in payroll costs or the declines in profitability between 1983 and 2009. Rising payroll costs have been a major problem in this industry from its earliest days; long before “Obamacare” existed.
While other expenses such as cost of goods and general overhead expenses (see Chart #1) have remained almost the same or even declined in the past 25 years, payroll costs have continued to soar as a percent of sales. Some companies have dealt with these increases far better than others.
Leaders vs. Laggards
The profit leaders in this industry, those in the top 25%, have consistently been able to control and maintain their payroll costs in the 25.5% range, while the worst run companies struggle to survive with payroll percentages in the 39-40% range. Surely, the differences in total payroll costs as a percent of sales between the best and the worst in this industry have little to do with healthcare premiums. The differences stem from poor management and poor decisions on the part of the owners. Yes, it is that simple.
Make no mistake about this—neither the government nor the current state of the economy can be blamed for the horrendous, totally unacceptable payroll ratios reported by the bottom two quartiles as shown in Chart #2. The blame falls, instead, squarely on the shoulders of the owners.
The dramatic decline in profitability in this industry can be traced almost directly to the steady increase in average payroll costs of 24.8% in 1983 to almost 33% at the end of 2009 (See Chart #1). There is no serious data to support the claim that increases in healthcare costs have been to blame for this dramatic rise in payroll costs
It is important to note that the relationship between payroll costs and profitability in this industry has rarely, if ever, been a question of paying employees too much or offering them too many benefits. The real culprit, as I have demonstrated time after time, has always been employing more people than are required to produce the work, as well as the failure to reduce staffing as companies acquire more productive equipment.