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The business impact of inefficient leave management

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A large part of India’s working population of 640 million works in small and medium enterprises (SMEs). There is a dire need in such organizations for an effective and efficient system of record for marking attendance and the absence or leave of your employees from work.

If you are wondering why are we talking about this basic aspect of any business in the 21st century when everyone is talking about robotics and artificial intelligence, think again; for effective and efficient use of leave and attendance management can potentially plug hidden leakages in your business and save you a great deal of costs.

Based on our experience of working with multiple small, mid-size and large enterprises, we present some business situations and how a leave management solution can help you handle them effectively, thus saving you valuable resources including time and money.

The cost of uncaptured leaves

Depending on the sector and registration mechanism used by your business, various leave-related legislations might be applicable to you. However, in most cases, apart from 1 weekly off, you are expected to provide with paid leave on defined national holidays. Typically, the types of leave granted to employees are Earned Leave (EL), Casual Leave (CL) and Sick leave (SL). Various companies and sectors then provide various types of limits of days under each of these categories and define rules on how they can be availed and under what circumstances. You also have to maintain leave balances, which are then encashed either at the end of service or at the end of the financial or calendar year, as the case may be. This is when the situation starts getting more complex, especially in the absence of an effective and efficient system of record and administration.

How Uncaptured leaves can hurt you: Some simple math

Total Number of Employees

100

Average salary per employee per month

INR 10,000

Uncaptured leave which accumulates per employee per year

1

Assumed % increase in salary every year

10%

Assumed Leave Encashment is done

At the end of every calendar year

Assumed % of uncaptured leave encashed

30%

Total Encashment Amout at revised salary after 1 year

Monthly Salary per employee x Total Uncaptured leaves that got encashed

= 11000 x 30 = 3,30,000

Total Encashment Amount assuming leaves are captured correctly & encashed in same calendar year before salary raise in April

Monthly Salary per employee x Total Uncaptured leaves that got encashed

= 10,000 x 30 = 3,00,000

Total Potential Loss

3,30,000 - 3,00,000 = INR 30,000

 

RELATED: Understanding leave and leave policies

“We have the registers”: The age-old leave workflow

In many organizations, including technology-driven and multinational organizations, we still see the presence of the attendance register at the entry point where employees are supposed to make entries about their login and logout times. We have seen the presence of these registers even in cases where there are biometric attendance systems in place, and are typically used as a second level checking process. Such registers are typically maintained and managed by the security, admin, or HR department depending on the sector and size of the organization. These registers are then reconciled at the end of the month to compute the actual present days and used for payment of wages.

If one looks at the above example of a company with 100 employees, the effort to ensure that the manual records are reconciled with electronically available records, if any, can easily run anywhere between 4 to 8 hours worth of work for an individual in a month. Assuming you pay this person a monthly salary of INR 15,000/-, effectively you are spending a minimum of INR 500 every month on doing just this one activity. This may not look like a large amount, but when you add the inefficiencies and personal favoritism this person is likely to exercise while doing this process, your leakages can quickly mount.

Simplified leave work flows, which pick up data from your attendance system and prompt employees, managers and HR to take proactive action can thus help you identify individuals who are potentially taking advantage of your manual and inefficient process.

Busting the myth of “We run a tight ship; we know who is on leave today”

An overwhelming percentage of employees show a definitive leave pattern before they resign. Thus, it is imperative for you to know the leave patterns that lead to attrition. In most mid sized organizations, while you may know who is on leave on a certain day, rarely would you look at leave patterns by various variables like location, department, gender, manager and many others. This type of analysis is not possible in traditional systems since most data about these variables is stored in different systems or Excel sheets. The other major reason for this analysis to be not available for effective decision making is also the lack of the requisite skill sets among employees and the fact that they are so busy completing transactional tasks.

RELATED: Leave: Is it a right or a benefit?

An efficiently designed leave management system will enable you to gather these insights which then help you take more informed decisions. The various reports available to you via the system ensure that you and your team look at the holistic picture. Understanding your leave patterns can enable you to take policy-level decisions which can help you control absenteeism and improve retention. Both these can have a direct impact on business efficiency and, potentially, profitability.

The efficiently designed leave management workflow also ensures that your managers can approve most leave requests or they can even be auto-approved based on defined rules. The way you manage your leaves can also indicate how you are treating your employees and establish the mutual contract of trust between your organization and the employees. Such automated systems ensure that all employees are aware of the leaves that they can avail and how many leaves are due to be accrued as per your leave policies at every point in time. This frees up your HR team from mundane transactions and enables them to focus on other business-critical tasks. This improvement in your HR department’s efficiency is unparalleled as it can mean you are able to hire more or faster while keeping your HR department’s size the same while also potentially reducing your hiring costs.

Leave year-end and employment leave calculation: The hidden dragon

In most companies, the challenges of leave accounting come to the fore when the employee has decided to leave the organization. It is not very uncommon for employees and the HR or Finance team to have a difference of opinion on the number of leaves to be encashed. In certain organizations, the leave encashment is done at the end of every calendar year or leave year end as defined by the organization. Irrespective of the time when this transcation is done, in manual systems, typically HR and Finance are likely to spend anywhere between 4 to 8 hours on this particular task. Using data from the example given above, the cost of carrying out this task could be anywhere between INR 500 to INR 1000 depending on certain factors.

While, again, this cost may not look too high on a monthly basis, when you compare this to lost efficiencies in the process, and more importantly the impact this is likely to leave on your employees, especially the ones leaving your organization, the damages can mount very quickly.

In conclusion

As per our estimates, assuming an organization of 100 employees, with an average monthly salary of INR 10,000, the following cost benefits can accrue to the business.

Potential Benefit Area

Assumptions

Total Estimated Annual Benefit

Capturing leaves effectively

1 day of leave per employee was not recorded and was encashed at a higher base pay rate

INR 30,000

Reconciliation errors

20% errors in leave records every month due to manual processes

INR 1,20,000

Improved HR efficiency

Reduced transactional effort means improved hiring effort at lower cost  - 20% reduction in cost of hiring and 10% improvement in on-time hiring

INR 1,00,000

Reduced absenteeism

Improved policy decisions based on reports resulting in reduced absenteeism by 10%

INR 1,00,000

Reduced attrition

Improved policy decisions based on reports, reducing attrition by 10%

INR 1,00,000

Total annual cost saved

 

INR 4,50,000

 

In addition to cost savings, the management of leaves using an online leave management system adds tremendous business value beyond being compliant with legal mandates, including having an accurate, systematic, and auditable trail of leave records of your employees. In the age of automation, this is one of the most simple processes that can be automated and can introduce multiple benefits to your business.

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