What Does Labor Burden Have to Do with Cash Management?
The quick, simple answer to what labor burden has to do with cash management is that the actual cost of an employee goes beyond their hourly rate or salary. Knowing the real cost of each employee allows you to budget, buy, and bid correctly.
Let’s look at it like this. Suppose you want to purchase gifts for your clients. You start by determining how much you can afford to spend on each gift. Say you’ve decided that you want to limit the gift expense to X number of dollars for each recipient.
So, you either set out on foot or let your fingers do the walking and discover these great whatchamacallits that cost only the X dollars you had determined to spend. Perfect! Right?
Well, not so fast!
Labor Burden Compares to Gift Burden
What are the costs involved in obtaining the gifts? Sales tax? Time to shop? Gas to get there? Shipping costs to receive the items? Are you wrapping the gifts? Are you including ribbons and bows? Will you add cards to the gifts? Will you need to mail the gifts? Will you have someone in your employ deliver the gifts?
Did you see the cost of the individual gift rise with each added expense? Let’s call all those “extras” the Gift Burden. By adding the Gift Burden cost to the gift cost, you know how much each gift genuinely costs.
The same is true of Labor Burden; the “extras” are added to the hourly or salaried rate of each employee. Your labor burden costs include benefits your construction company must, or chooses to, pay for employees included on your payroll.
Labor Burden that Must be Included
In case you missed it, even in the Gift Burden described above, there is a bit of governmental involvement. Sales tax adds to the cost of your gifts. In Labor Burden, there is also governmental involvement. Consider these Acts, mandates, and laws.
The Federal Insurance Contributions Act (FICA) includes Social Security and Medicare contributions that employers are required to match with employee contributions.
The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees.
The Federal Insurance Contributions Act (FICA) requires wage earners to contribute a portion of their earnings to fund the Social Security and Medicare programs.
The State Unemployment Tax Act (SUTA) is a payroll tax employers pay into a state unemployment fund.
The Federal Unemployment Tax Act (FUTA) along with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a Federal and a state unemployment tax.
Paid Time Off (PTO) While there is no federal mandate, some states have enacted laws requiring employers to provide specific types of paid leave, like sick leave, which can be incorporated into a PTO policy.
Workers’ Compensation Insurance Most employers are legally required to purchase workers’ compensation. Except for Texas, all states mandate that companies buy workers’ compensation coverage.
Labor Burden You Choose to Include
Construction contractors can choose to give their employees any number of benefits. Things like:
Fuel reimbursement
Vehicle usage
Health insurance
Vision insurance
Dental insurance
iPad or other electronics
Uniforms
Paid vacation time
Retirement plans
It turns out that none of these company benefits are free. When these costs aren’t fully accounted for, it can lead to cash flow surprises that ripple through the entire business.
Include Labor Burden in Your Cash Management Plan
When building cash reserves, remember to factor in the total labor burden. This means including all employee-related costs in your budgeting and forecasting. Visualizing how cash moves through your business allows you to anticipate these costs, ensure you’re pricing jobs accurately, and avoid mid-project cash shortfalls.
A solid cash management system helps subcontractors go from hoping there’s enough to pay the bills to strategically planning for expenses and growth. Start by identifying the actual cost of labor and build it into your bids and forecasts.
The Burden of Neglecting Labor Burden
Neglecting Labor Burden? No!
Follow this link, The Burden of Neglecting Labor Burden to learn more about the Labor Burden issue.
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Clients and customers
Employees and subcontractors
Vendors and service providers
Governmental entities
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Remain informed
Avoid hassles
Reduce risks
Be future-ready
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