How to Manage Personnel Costs for Startups
During the startup phase of a business, it’s crucial to establish foundational elements that ensure long-term stability. Mistakes made early on can quickly jeopardize the future of your startup. As any successful entrepreneur knows, a business cannot thrive without skilled employees.
When you hire employees as a founder, you must also consider how to manage their compensation. Becoming an employer presents a new challenge: calculating personnel costs.
Understanding Personnel Costs
Personnel costs represent a significant expense for businesses and are often underestimated. It’s important to carefully plan for the staffing needs of your business, especially considering future growth.
For accurate financial planning, create a detailed staffing plan as part of your business plan, ideally covering the first five years. This should include:
- All employees listed by their role.
- Their wages or salaries.
- Employer-paid social security contributions.
Calculating personnel costs for each employee in the business plan is essential to understand overall expenses. Image Credit: Pixabay
Categories of Costs in a Business
Personnel costs contribute to total expenses, which are vital for smooth business operations. Before you focus on financing personnel, you should first develop a business plan to ensure you account for all aspects of the costs involved.
Here are the four main categories of costs for businesses:
- Training Costs: These are essential for getting your business off the ground, including expenses like notary fees, business registration, and patent costs.
- Investments: These are necessary expenditures like equipment, real estate, or computers. Investments increase the company’s equity ratio.
- Variable Costs: These costs fluctuate based on sales and include materials, logistics, and packaging costs.
- Fixed Costs: Regular, ongoing expenses such as rent, electricity, insurance, and personnel costs.
Freelancer Portals: A Flexible Alternative to Full-Time Employees
If you’re a startup with limited funds or if you prefer not to commit to a full-time workforce, consider hiring freelancers for specific projects. Freelance platforms allow you to post projects, offering a cost-effective way to manage personnel costs while keeping your team flexible.
Tip: Explore the best freelance project portals to find affordable talent.
How Personnel Costs Are Incurred
Many startup founders are unaware of the true cost of hiring employees. Personnel expenses should be considered early on in the planning phase of your business. Properly calculating these costs ensures you don’t exceed your funding limits.
Personnel costs include both direct salaries and additional expenses, such as:
- Employer contributions to social security.
- Paid holidays.
- Work attire or travel costs.
- Indirect costs like office supplies or cleaning fees.
In total, these costs can account for 30-40% of a company’s overall expenses.
Salary vs. Wages: Understanding the Difference
It’s important to distinguish between salary and wages when calculating personnel costs. While a salary is fixed, wages vary based on working days or employee performance.
Calculating Personnel Costs
Simply knowing an employee’s gross monthly salary isn’t enough to calculate personnel costs accurately. It’s advisable to plan more generously to avoid unforeseen expenses. Key factors to consider when calculating personnel costs include:
- Gross monthly salary.
- Additional benefits and services.
- Mandatory social security contributions (around 21% of the gross salary).
- Union contributions.
- Training and professional development costs.
Planning long-term personnel costs requires a comprehensive view, considering variables like minimum wage regulations and potential subsidies. Founders must carefully evaluate the cost-effectiveness of each employee in relation to company funding.
Tools for Payroll Accounting
For easier payroll calculations, there are many useful tools available. Check out our review of the best payroll software to streamline your financial planning and ensure compliance.