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Loss Prevention, Safety

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Budgeting for Safety Shouldn’t be an Afterthought

By Safety Management Group

This is the time of year when most companies are trying to project next year’s costs and revenues. While nearly all of them attempt to forecast as accurately as possible, far too few give a great deal of thought to safety.

Safety affects the bottom line in two ways. Most people instantly recognize the first, which is the cost of complying with safety rules and providing the tools and training needed to ensure a safe workplace. But the second safety-related cost factor actually tends to have a much larger effect on the bottom line. That factor is the negative costs and expenses you avoid by having an effective safety program.

That’s not wishful thinking. Companies that have implemented comprehensive safety and health programs report that employee morale improves, leading to increases in productivity, competitiveness, and profits. These companies view losses from accidents in the same way they look at any other type of loss – as a business risk that must be prevented. Taking steps to prevent such losses is not considered to be part of the company’s overhead. Instead, it’s an investment in the company’s own health.

Safety has a clear ROI

In fact, independent studies have consistently shown that every dollar invested in safety programs provides a payback of $4 to $6 in reduced costs. As a manager, if you knew that a $10,000 investment in a piece of equipment would lower your annual labor costs by $25,000, you’d probably consider that to be very wise decision. That same $10,000 invested in your safety program could return $40,000 to $60,000 in lower costs. So which is the smarter investment?

Examining the return on investment (ROI) of safety makes just as much sense as looking at the return on your other investments. Actually, it may make even more sense. Consider that workplace injuries, illnesses and fatalities cost more than $170 billion per year in the U.S. More than one million injuries and 2.3 million cases of ill-health are experienced by workers in an average year, contributing to a loss of about 40 million working days.

The indirect costs of incidents

You’re familiar with the direct costs of injuries in your workplace. But were you aware that those costs are just the tip of the iceberg? What are known as “indirect” costs of workplace injuries are substantially greater. Various studies have determined that indirect costs are anywhere from four to fifty times the direct costs experienced by employers.

If you find that hard to believe, consider what a lost-time accident creates in indirect costs. You’ll have to pay for replacement labor while your worker recovers. Your supervisory staff probably had to take time away from their regular tasks to address the situation, and you may have assumed some additional costs to investigate and document the incident. But there may have also been production downtime, as other employees stopped working to help, watch, or simply talk about the incident. Equipment they may need could have been damaged – or the injured employee may have been the only one with knowledge about a particular procedure or process. You may face OSHA fines and legal costs. In the worst-case situations, the injury may cause you to lose a contract with a customer that has very strict safety standards — or even put your company on the 10:00 news or the front page of the newspaper.

Consider the costs of making up lost work. The standard computation involves the cost of the incident and its related claims by your normal profit percentage. Multiply that number by 100, and you’ll see how much more you need to sell just to make up what you lost in the incident. If an incident cost you $230,000, and your company earns a normal operating profit of 13.47 percent, you’d have to sell an addition $1.7 million in products to compensate for the incident.

Having incident claims on your record will affect what you pay in workers’ comp premiums, because your EMR (experience modification ratio) will increase. Have enough claims, and your carrier may even refuse to cover you.

How do you begin to budget for safety?

As you start the process of developing your safety budget, remember the ROI a safety program provides. In addition, consider the fact that the money you’ll invest in your safety program will likely be less than the total direct and indirect costs of just one preventable incident.

One of the best ways to determine how much you’ll need to budget is to consider three readily available sources. The first of these is paying attention to trends in your company’s safety incidents and your own observations of employee activities regarding safety. The second involves reaching out to your employees, and the third focuses on compliance data collected by the government.

Watching trends in your company’s safety culture demands some effort, but it can provide tremendous insight. For example, we were working on a large construction project that encouraged tradesmen to use eye protection only when performing certain tasks. After noticing a high frequency of eye-related incidents over several months, we implemented a 100% safety glasses policy and saw a major drop in eye injuries. Beyond your own observations, you can study your company’s workers’ compensation claims and other health records to gather information.

Employees can be an excellent source of safety-related information, because they deal with issues daily and have the best understanding of the problems. If you don’t already survey employees about safety, ask them four simple questions:

  1. Have you had any safety-related incidents in the past year (if yes, explain)?
  2. Do you have any safety-related concerns about your job and/or work area (if yes, explain)?
  3. Do you have any ideas or recommendations for improving safety in your work area, and if yes, what would you improve and how?
  4. Do you have all of the necessary Personal Protective Equipment to protect yourself while working (if no, explain)?

Acting on the feedback you receive can result in a tremendous morale and confidence boost for your safety program.

Finally, it pays to review OSHA’s current data for the top ten most-cited safety issues. The categories will give you a sense of the areas in which OSHA inspectors are focusing their efforts. That way, you can examine these areas in your own company and determine what steps you need to take to ensure compliance.

Putting it all together

Now that you’ve identified your company’s specific safety needs, you’ll be better able to determine the cost of the training and equipment you’ll need to improve the safety of your workplace.

By looking beyond the direct costs of injuries and other incidents that impact employee health, and focusing on the economic impact safety problems have upon the business, management will be in a better position to make confident, informed decisions. Even more important, it will ensure that all of your workers return home safe and healthy every day, reducing the likelihood that their families and friends will suffer the ill effects of an injury.

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