So, you own or manage an industrial company and you are thinking about growth. Tradesmen are probably your revenue-generating employees and it makes sense that, if you can find great tradesmen (and we know that great ones are not easy to find), you could increase the revenue and profit in your business. But you may be asking yourself, “How much is a new tradesman worth to my business?” Is it worth the cost to find one or how much will my business benefit from making a tradesman hire?
From our experience at Xemplar Tradesmen Recruiting, it’s helpful to most owners and managers to be able to calculate this value. So let’s take a look at how to do it.
“New Tradesman Value” is the total value that a new tradesman will create for your business over the course of his or her total job tenure with your company. In other words, if I hire and retain this person, what value will he or she bring to the organization? Or what is my “return” if I invest today in a new tradesman?
The formula for “New Tradesman Value” in its most basic form is the difference between how much profit is generated by the tradesman annually minus the cost to employ him or her annually all multiplied by the number of years that he or she is with your business.
To calculate “New Tradesman Value” we combine five inputs. These inputs are:
Let’s dive into each of these inputs one-by-one to understand them better:
The first question we want to answer is: “If I add this new tradesman, how much new revenue will my company be able to add to the business?” To find calculate this value, take your annual revenue or sales and divide it by the number of revenue-generating employees you have, such as your service or production tradesmen. Think about anyone who does a billable activity or is responsible for generating a product that will be sold. You may need to look at this value in terms of a division, where you would take the division revenue and divide it by the revenue-generating employees in that division.
Not all tradesmen are the same, so you can adjust that number up or down based on the class of tradesman or employee you are considering. If it is a more skilled or experienced tradesman, you can nudge that number up by some percentage. If it is a less experienced tradesman, you can nudge that number down by some percentage.
The second question that we are looking to answer is: “If my new tradesman generates this amount of revenue per year, how much of it does the company get to keep?” Gross profit is defined as “the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services.”
You can easily calculate your gross profit percentage by dividing your gross profit amount by your sales. This percentage should give you the answer to the question just above when multiplied by your revenue per year.
If you are interested, after calculating your own gross profit margin percentage, you can easily benchmark that percentage against other businesses in your industry using the financials of public companies or by using online resources.
The third question we are looking to answer is: “If my tradesman generates this amount of profit for the company each year, how much is left after we subtract his or her cost of employment?”
Your annual tradesman or employee expense should include compensation for the tradesman (including expected overtime) plus the full burden of payroll taxes, workers’ compensation insurance, bonuses and benefits. This expense generally represents an approximate 15% to 40% additional cost on top of the individual’s compensation.
If you are not sure, 25% to 30% is a good rough estimate.
The fourth question we are determining is: “If we know how much profit is left at the end of the year (including annual employee expenses), how many years should we expect this tradesman to be employed by your company (and, therefore, for how long can you generate this profit stream)?”
Average tenure is the number of years your quality tradesman is likely to stay with your company. If you have a sense of historical averages for your business or this division, use that number. The Bureau of Labor Statistics provides a national tenure average (as of 2018) of 4.2 years (Source).
The fifth question we are exploring is: “If we know the total profit generated by our tradesman over his or her tenure, how much initial cost is there to get this new tradesman into that position?”
One-time capital costs for the new employee include initial training, certification costs, personal protection equipment, tools and/or any additional equipment that is required to get the new tradesman set-up to do his or her job.
The actual “New Tradesman Value Formula” is the combination of the values calculated above, and can be written as follows:
New Tradesman Value Formula:
(((Annual Revenue Per New Tradesman x Annual Gross Profit Margin) – Annual Tradesman Expense) x Average Tenure At Your Company) – One-Time Training & Equipment Costs = New Hire Value
Or using the abbreviations above:
(((Rev x GP%) – TExp) x Yrs) – 1xCosts) = New Tradesman Value
Let’s put it to work!
With the formula above, you should now have the basic tools to look within your company and determine a “New Tradesman Value” for your trades positions.
As is likely, if your “New Tradesman Value” is positive and represents an attractive value-creation opportunity for your business, get out there and find the extraordinary people that you need to capture that value. While the job market is tight for most trades positions, don’t give up! It’s worth it!
Xemplar is a tradesmen recruiting company, sourcing and placing trades professionals such as mechanics, machinists, welders, assemblers, fabricators, electricians and techs for long-term placement with best-in-class industrial companies within our target markets throughout the United States. If your business demands high-quality industrial tradespeople and you are serious about beating the skilled labor shortage, contact us today via our website at www.xemplar.com or at 1-844-XEMPLAR (844-936-7527).