Asset Turnover Ratio

Category: HR.

When it comes to HR metrics, the cost of workforce is the elephant and the room and the reason for that is quite transparent: in more than half of all the companies, assessing and gauging the cost of workforce is something that the Finances department takes care of.

In the rest of the cases, this is indeed something that falls on the shoulders of HR, which is often comprised of people that don’t require the know-how that’s necessary for dabbling into such territories.

There is good news, too: calculating the cost of workforce is not that complex of an issue. In the following, we’ll tell you everything you – as an HR worker, but not necessarily – should know about this mysterious cost of workforce.

What is the Cost of Workforce

Most people think of the cost of workforce as the sum of all the salaries paid to all the employees of any given company. Whilst that is true, this definition is only partial. The cost of workforce (COW) usually regards all the types of costs that are related to personnel.

For instance, recruiting and training costs should be taken into consideration when putting together a COW report, and so should the benefits, performance bonuses, taxes, insurance, monthly events, vacation pays, overtime and holiday pay, etc. Once you’ve got a good sense of what cost actually implies in this context, you’re ready to calculate it.

How do we Calculate It?

If you’re an HR rep, you should ask for help from someone from Finances, especially if you’re about to be doing it for the first time. In order to get your cost of workforce percentage, you simply divide the cost you got from doing research with the total operating costs of the company you’re working for.

Here’s an example: Let’s assume that the cost of workforce is $5.000 per month and the total operating costs of the company are $11.000 per month. The result is 0.45. Now simply multiply this figure by 100 and you get the total cost of workforce, which is 45%. It’s certainly not rocket science.

Why are so many people having trouble with doing this? It’s simple: first of all, it takes a while to accumulate all the data you need, particularly when you don’t know what you’re looking for. Second of all, most HR reps have no idea whatsoever what costs they should take into consideration and which not.

The Bottom Line

As a CFO, knowing the total cost of workforce (TCOW, for short), is indispensable when you have thoughts of giving people raises, promoting them, hiring new people and training those people, unless you want to drive the company into the ground by paying your employees money that you can’t afford paying.

Regardless of whether you’re an HR rep or a skilled accountant, calculating the TCOW will most definitely take you a while, but it’s a necessary evil – evil as in boring because there is absolutely nothing fun in crunching numbers until you can do without that promised raise.

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