WELCOME TO ISSUE NO #060

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📆 Today’s Rundown

Hey 👋, hope you had a great week! In the last issue, we discussed why tracking Headcount Metrics matter, and now we are moving with the next topic from Headcount content.

Let’s talk about ⬇️

Labor Cost

Most business owners think labor cost = salary + benefits.

But after analyzing hundreds of company budgets and seeing labor costs balloon to 70% of total spend, I can tell you nothing is further from the truth.

In reality, you ONLY need to track these 5 hidden cost factors:

• Hiring & onboarding expenses

• Fully-loaded salary calculations

• Benefits that scale with headcount

• Tax obligations you can't ignore

• Strategic cost allocation decisions

And today, I want to walk you through how each of these factors work so you can finally get control over your largest business expense.

Let's dig in!

TL;DR

1️⃣ Hidden Hiring Costs

2️⃣ Fully-Loaded Salary Reality

3️⃣ Benefits That Compound

4️⃣ Tax Calculations You Can't Escape

5️⃣ Strategic Cost Allocation

1️⃣ Hidden Hiring Costs

The goal here is to capture your true cost-per-hire that goes way beyond just posting job ads on LinkedIn.

Most companies think hiring costs are just recruiter fees. Wrong.

You've got equipment costs (laptops, monitors, software licenses), training programs, legal fees for background checks, and administrative costs that add up fast.

But here's what kills most budgets: Different departments have wildly different onboarding costs.

Your engineering team needs $2,500 MacBook Pros and expensive software like JIRA. Your sales team needs $800 laptops but requires travel budgets and Salesforce licenses.

If you're hiring 20 people at once, you also need to factor in office space expansion and additional rent costs.

Real example: That $90K consultant we mentioned? Their true onboarding cost was $1,900 ($1,500 laptop + $400 in G&A costs). Multiply that across your entire team and you're looking at serious money.

2️⃣ Fully-Loaded Salary Reality

The goal is to see the real cost hiding behind that innocent-looking "$90K salary" on your job posting.

Here's a gut punch: Most business owners are off by 20-30% when calculating what employees actually cost.

Let me walk you through the math with our IT consultant example:

• Base salary: $90,000

• Equipment & onboarding: $1,900

• Health insurance (employee + family): $24,960/year

• 401(k) matching (7.4%): $6,660

• Travel allowance: $3,500

• FICA taxes (7.65%): $6,885

• FUTA taxes: $540

Total annual cost: $111,565

That's a 24% increase over the base salary that most business owners completely miss in their budgeting.

Now imagine you're hiring 10 people. You think you need $900K but you actually need $1.1M+. That's a $200K+ budget shortfall that could kill your runway.

The kicker: This calculation changes for every role type. A software engineer might need a $3K laptop and work-from-home stipends. A salesperson needs travel budgets but cheaper equipment.

3️⃣ Benefits That Compound

The goal here is to understand how "small" benefits can absolutely demolish your budget as you scale.

Here's the trap most founders fall into: They think benefits are fixed costs per employee. They're not.

Take health insurance. You might pay $520/month for a single employee. But if they have a spouse and kids? Now you're paying $2,080/month for that same person.

401(k) matching gets even crazier. If you match 6% and your average salary increases from $75K to $100K, your matching costs per employee jump from $4,500 to $6,000 annually. Across 50 employees, that's an extra $75K you didn't see coming.

Work-from-home stipends, wellness allowances, professional development budgets - these all scale with headcount and salary growth.

Real-world example: A SaaS company I analyzed went from 25 to 100 employees in 18 months. Their benefits costs didn't just quadruple - they grew 5.2x because average salaries increased AND they added family coverage for more employees.

The solution: Set caps upfront. Maybe you cover 75% of health premiums with a $15K family cap. Maybe 401(k) matching has a $5K annual limit.

4️⃣ Tax Calculations You Can't Escape

The goal is to properly budget for the tax obligations that many business owners forget exist.

Good news first: Income taxes are withheld from employee paychecks, so you just remit them, not pay them.

Bad news: You're still on the hook for several taxes that come directly from company revenue.

FICA taxes hit you for 7.65% of every employee's salary. That's 6.2% for Social Security + 1.45% for Medicare. Non-negotiable. A $100K employee costs you $7,650 in FICA annually.

FUTA (Federal Unemployment Tax) is 6% of salary up to $7,000 per employee. Most states cover 5.4% of this, so you typically pay 0.6% × $7,000 = $42 per employee per year. Not huge, but it adds up.

State unemployment taxes vary wildly - from 0.1% in some states to over 10% in others. This is where location strategy matters.

Payroll tax calculation methods:

• Wage bracket method: For salaries under $100K, use IRS Publication 15-T tables

• Percentage method: For salaries over $100K, calculate base amount plus percentage of excess

5️⃣ Strategic Cost Allocation

Alright, we're almost done here. But before we wrap up, there's one last factor that separates profitable companies from those burning cash:

The goal here is to separate direct vs. indirect labor costs so you can price products correctly and see true profit margins.

Direct labor costs are employees who directly generate revenue:

• Engineers building your product

• Sales reps closing deals

• Consultants delivering services

• Content creators producing what you sell

Indirect labor costs support operations but don't directly drive revenue:

• HR recruiting and managing people

• Marketing generating leads (but not closing them)

• Customer success (post-sale support)

• Finance and admin teams

Why this split matters for your bottom line:

If you're a consulting firm charging $200/hour, you need to know that your $90K consultant (who costs you $111K fully-loaded) can bill 1,500 hours annually. That's $74 per billable hour in labor costs.

With a 40% gross margin target, you should charge at least $123/hour for their time. But if you calculated based on just their $90K salary ($60/hour), you'd underprice by $14/hour and kill your margins.

For SaaS companies: Track engineering costs as direct (they build what you sell) but customer success as indirect (they support what you've already sold).

The profit impact: Companies that properly allocate direct vs. indirect costs typically see 15-20% higher profit margins because they price more accurately.

Need clarity on your financial strategy or cash flow optimization?

I'm Aleksandar, fractional CFO at Fiscallion, where we help founders like you achieve financial clarity, streamline reporting, and build investor-ready forecasts.

Ready to level up your finances?

The Bottom Line

Labor costs will likely be 60-70% of your total expenses. Aim to keep them between 20-30% of gross revenue.

Anything higher and you're bleeding profit. Anything lower and you might be underinvesting in growth.

Quick action items:

1. Calculate fully-loaded costs for each role type

2. Set benefit caps before they spiral

3. Budget 8-10% extra for taxes beyond salaries

4. Track direct vs. indirect labor separately

5. Review all labor costs quarterly, not annually

And that's it! Hope you find these helpful.

And if you have any other finance-related questions about scaling your team profitably, please don't hesitate to hit reply & let me know. I'm here to help 😃

Chat soon

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