Why Having a High Employee Turnover Rate Can Drain Your Bank Account

Hire Good PeopleAccording to the Bureau of Labor Statistics September news release, national employment is on the rise. However, the number of quits have been steadily increasing since the end of the recession, with numbers ranging from 2.7-2.8 million over the past 11 months. (See Table 10 or a breakdown of quits in specified industries and regions.)

How does a high employee turnover rate affect your business financials?

With so many job applicants to choose from, it seems to makes good business sense to let unsatisfied employees quit rather than raising their salaries to be competitive. However, CBS MoneyWatch warns that business who practice this technique are actually shooting themselves in the foot.

“Although employee replacement costs are a one-time expense and a salary increase is ongoing, it would take four years of a higher salary to equal the cost of replacing [an employee] one time.” -CBS MoneyWatch

The Center for American Progress also published an article detailing the financial consequences of a high employee turnover rate. In a study compiled from 30 cases, they found that it will cost businesses about one-fifth of a worker’s annual salary to replace him should he quit.

Check out the chart below to see how replacing employees affects your bottom line:

How Replacing Employees Affects Your Bottom Line

(Source: Center for American Progress)

Calculating the Direct & Indirect Costs of Employee Turnover

Typically when an employee leaves a company, his position must be filled in order for operations to continue running smoothly. The company will experience both direct and indirect costs as a result. While direct costs are often easier to measure, they are usually less expensive than indirect costs. indirect costs are more difficult to ascertain, however they can be detrimental because they may encourage other employees (as well as clients) to part ways with a company experiencing a high turnover rate. Here are a few examples of both cost types:

Direct Costs

  • Separation costs (exit interviews, severance pay, and higher unemployment taxes)
  • Labor costs increase to cover the employee’s duties (overtime for other staff or temporary hires)
  • Replacement costs (open position advertising, search and agency fees, screenings, fingerprints, background checks, drug testing, physicals, hiring bonuses, applicant travel and relocation reimbursement, etc.)
  • Training costs (orientation, classroom and on-the-job training, certifications, uniforms, handbooks, etc.)

Indirect Costs

  • Loss of productivity the last days before the employee’s departure due to reduced morale
  • Loss of productivity as a result of being understaffed
  • Reduction in the overall morale of all employees coping with the vacancy and extra responsibilities, which also leads to loss of productivity
  • Reduced quality, errors, and waste as the new employee learns his/her job
  • Unsatisfied clients

(Source: Center for American Progress)

At Two Roads, we offer sound financial advice to help you stay profitable. For more information about how our bookkeeping services can do just that, contact us at 865-212-0063.

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