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Cost of own labour

  • 10-03-2016 2:48pm
    #1
    arrowman
    Registered Users, Registered Users 2 Posts: 124 ✭✭


    Part of my day job involves assessing the profitability of individual businesses in a particular sector. All of these businesses operate slightly differently - with differences over products sold, systems of production, raw materials purchased and whether they are making use of their own capital or are leasing or borrowing capital.
    Most of the businesses are operating as sole traders but there are some that are using a company structure.
    They are mostly family owned and operated with a significant labour input by the owner and this is often supplemented by family labour.
    I report back to these businesses on their financial performance (based on information supplied on revenue and costs) on an individual basis but I also analyse all the businesses as a batch and show the average, top and bottom performers for comparison purposes.
    The main figures reported back are business output, total costs and net margin (profit) with the underlying detail also disclosed.

    Now to my question...
    In the calculation of total costs (to offset against revenue) I DO NOT include any charge for either the farmers or the families own labour. I do however include a labour cost for any PAID labour This is in line with general accountancy principles.
    Some of the businesses query this and say that by not including a cost for own labour I am not showing the true cost of running the business. They point to the following facts in support of this
    - where a larger scale business takes on additional labour this IS included as a cost
    - smaller scale businesses choose not to take on paid labour but the farmer is supplying this labour (at zero cost in my calculation)
    - businesses that are incorporated have a charge included for the directors salary (I generally DO NOT include this as a labour cost to make these incorporated business comparable with their sole trader compatriots)

    I am sticking to my guns that the NET PROFIT figure is the return to the business owner for his labour and managerial input as well as providing a return on the capital employed in the business.

    Am I right in this? Is there an angle to this which I cannot see?


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