Why is cost such an important consideration in personnel processes?

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kipling2448 eNotes educator| Certified Educator

Running a business means spending a lot of time studying balance sheets.  Balance sheets generally have two columns, one reflecting revenue, or money coming in, and the other showing expenditures, or money going out.  When determining how many individuals, and of what skill levels, a company can afford, it has to look at the costs associated with hiring personnel.  Those costs involve much more than just baseline salary; they also include health insurance for all employees, costs associated with vacation and sick days for employees, and workers' compensation payments that must be made. Personnel costs, in short, can be the most expensive part of operating a company.  Those costs are reflected on the balance sheet, and represent one of the trade-offs managers or owners must make when considering the company's profitability.

When determining how many people to hire, the manager examines the costs of individual workers and weighs that against the revenue anticipated from the productivity those workers will provide.  The more goods or services produced by each worker, the more revenue that can be generated.  Inefficient manufacturing processes, excessive material costs, or exaggerated labor costs --i.e., the personnel -- will also diminish profits by making the cost of doing business rise.  If competition is weak, then prices can rise to accommodate those expenses; if competition is strong, costs have to be reduced, and that means eliminating workers.