This post is categorized as small business advice because I am going to show you a common mistake that I see many small businesses make. This concept has some application in your life. If nothing else, it will show you to think decisions through to their natural conclusion. Here is an example. Let us say that the company you work for has some simple “task” contracted out to another company. This “task” must be completed every day for 180 days and your company will pay $250 dollars for this service. Finally, your company is fully staffed and everyone has 8 hours of work to do every day (no one is sitting around doing nothing). Given this situation, this is what I hear from one of the managers of you company all the time: “You know, it only takes that company 2 employees and 2 hours a day to do that “task”. We can buy this piece of equipment for $4500 and do it ourselves and save $250 a day.” This is the point where I stare at the manager and try to think of a polite way to tell them what I am going to tell you. First off. Where did the manager go wrong? I can see three problems right away. Try thinking about what he forgot. 1. We will do the easy one first. Your company has to spend $4500 for a piece of equipment. $4500 divided by 180 days is $25 a day. Therefore right of the bat you are saving $225 a day not $250. 2. “Do it ourselves.” This means the manager is going to use his employees. I do not know why but employers make the mistake of thinking that their employees work for free, however, they do not. Each employee actually cost the company $30 each per hour. (That is what it cost to pay them plus cover their benefits). Now we subtract $30 x 2 hours x 2 employees ($120 total) from the $225 above and now the company is saving $105 a day. 3. This one is the hardest for people to see. Employees generate revenue for you company. The two employees above cost the company $120 for 2 hours of work as we saw above. Assuming the company is profitable; those two employees must generate more than $120 of revenue over the same period for the company to be profitable. For the sake of argument if the generate double there salary plus benefits we can subtract$120 again. $105 left over from above minus $120 means that it is costing you company at least $15 more per day to do this “task” themselves. Now, I made you read all of that because it makes an important point. You must do your best to think of everything before you make a financial decision. Just as managers see in the example above: we save $250 a day by doing it ourselves. The manager only sees that do not have to pay someone else $250 a day. They do not see the cost of labor or the lost revenue. The saying “Time is money” always holds true. One example of how this can be applied to your life is buying a house. You have $900 a month you can spend on a mortgage. You go online, plug $900 in to a mortgage calculator, and find out that you can buy a house for $167,000 at 5%. You go out and buy a house for that amount. Your monthly mortgage payment will be $896.49. Fantastic! What did you forget? That is right property taxes and homeowners insurance. Your monthly payment ends up being $1243.00 and you are spending $343 dollars more than you expected a month. Think about things from as many directions as possible and you wallet will thank you for it. No related posts.