In cost accounting, qualitative factors don’t involve numbers and financial analysis. Call them “people” factors. Decisions based in part on qualitative factors are relevant, even though you can’t tie specific cost or revenue numbers to them. They can have a long-term impact on profitability, so you need to consider them. Qualitative factors should always be considered before making any business decisions.
The qualitative factor that has the biggest impact on your business may be employee morale. It’s really an issue when there’s bad news, such as a layoff. Layoffs, as a rule, don’t improve employee morale. Employees are uncertain about their futures, even if they’ve been told that their jobs are secure. They may be skeptical, saying, “Yeah, and if you believe that, I’ve got a bridge I want to sell you.”
On top of that, the remaining employees may have to take on the workload of people who were let go. The worst thing you can say to them is, “Work smarter, not harder.” Employees have a BS meter that’s always operating, and that statement is a 9.9 on a scale of 10.
There’s a rule that’s true far more often than not: When employee morale goes down, productivity goes down, too.
When companies reduce the workforce, the goal is to reduce costs. If a firm has 100 employees and cuts the staff to 80 people, you’d think profits would go up. The company cut the cost (salary and benefits) of 20 people. The problem occurs with the remaining 80 people. Productivity (how much they get done) suffers in the short term. Also, most people have an emotional reaction to the layoff. That emotion affects productivity.
There’s another, bigger potential problem with layoffs: When you lay people off, some institutional knowledge leaves with them. Even the best operations manual can’t cover everything. If a company lays off a great sales representative, personal relationships with customers may suffer, too.
When other key people leave, those taking up their duties will make mistakes — that’s almost unavoidable. Those mistakes can cost the company business, if the company isn’t careful. In extreme situations, lost business (due to mistakes) costs more than the cost savings from the layoff.
You may not be able to trace the impact of a qualitative factor such as layoff effects to product costs, but you can allocate it. Doing so adds more lines to your decision-making analysis. It also requires you to make judicious estimates. For example, you might say, “I’m going to assume a 10 percent drop in productivity for three months.”
The remainder of the decision-making process is simple but requires some detail work. First, implement your decision. Then evaluate the outcome of your decision. The results will tell you if you decided wisely. If you’ve made a mistake, you must make new decisions about how to fix it.