Return on Investment
Over the past few weeks, you may have started building a Farm Safety Plan and governing your organization using the Farm Sustainability Assessment. In part of those two things, you may have started to identify hazards, created a risk management program, and implemented hazard control measures while at the same time involved your workforce to improve employee engagement which in turn will all create a sustainable farm.
You may be leery of all this, so I want to take this opportunity to show you the return on your investment. Refer to the Farm Safety Plan Section 5, where you have implemented the incident and investigation policy and now have employees completing incident reports to track the root causes of incidents and the costs associated with such events, if you haven’t done so already.
Direct and indirect costs should be tracked to get a good idea of how much incidents or injuries truly cost and affect your bottom line. Direct costs are dollars spent and easily tracked such as the actual cost of repairs to property, equipment or vehicle as well as some medical costs and claims costs. Indirect costs are hidden costs that are not easily tracked such as replacement workers, insurance premium increases, delays in work progress, damage to capital assets, damage to morale and decline in productivity, time spent investigating the incident and implementing corrective actions and any legal costs or fines. Indirect costs do not have a specific number assigned to them, so they are calculated based on a factor of the direct costs. Depending on the level of risk for your farm activities and the number of incidents you have experienced, a ratio of 4 to 6 is used to calculate indirect costs.
If you have low risk and few incidents, you would use a factor of 4 and if you have high risk and frequent incidents, you would use a factor of 6. Between low and high risk, use a factor of 5. So, you would multiply your direct costs by 4, 5, or 6 and then add the total direct costs and indirect costs together.
You will need to know your profit margin for the year evaluated as well. If you are looking at 2018, you will need to know the profit margin for 2018, as well as the total direct and indirect costs of incidents and injuries for 2018. Use the following formula to calculate how much income you will need to make up for the cost of injuries and incidents.
Total Cost of Injuries & Incidents = Income needed to pay for Injuries and Incidents
This example is for a farm with a high number of incidents and injuries so a risk factor in calculating indirect costs is 6 and the profit margin for the farm is 4%.
Direct Costs = $30,000 Indirect Costs = $30, 000 x 6 = $180,000
$30,000 + $180, 000 = $210, 000 Total Costs
$210, 000 / 4% = $5,250,000 of income needed to pay for injuries and incidents.
This example is for a farm with a low number of incidents and injuries so a risk factor in calculating indirect costs is 4 and the profit margin for the farm is 2%.
Direct Costs = $5,000 Indirect Costs = $5, 000 x 4 = $20,000
$5,000 + $20, 000 = $25, 000 Total Costs
$25, 000 / 2% = $1,250,000 of income needed to pay for injuries and incidents.
As you can see from the examples, injuries and incidents are very expensive, and prevention is key not only for financial reasons but to sustain a happy and health workforce of engaged workers.
Various studies have shown that for every $1 invested in incident and injury prevention returns about $2-$6 to your bottom line. That is profit which can be reinvested into your farm to have a higher level of sustainability.
Reference: Bird Jr, Germain, and Douglas. Practical Loss Control Leadership. 3rd Edition. USA. Det Norske Veritas. April 2007.