The hidden People profit and loss: How to calculate and improve HR ROI
When business owners review their P&L, they know exactly what they're spending on rent, technology, utilities and salaries. What they often don't see are the people costs quietly sitting behind the numbers. Hannah Taylor, People Lead at Fact 3 shares her thoughts on how business can calculate and improve HR return on investment…
Poor hires, avoidable turnover, absence, under-performance that's allowed to drift, managers spending hours dealing with employee issues, recruitment fees, overtime to cover vacancies. None of these costs usually sit neatly on a spreadsheet, but all of them affect profitability. That's why I think SMEs should stop asking, "What does HR cost?" and start asking, "What are our people issues already costing us?"
Why are more SME owners looking at fractional HR?
The simple answer is that SMEs are being asked to do more with less.
Most growing businesses need experienced People support, but they don't always need or want a full-time senior HR hire.
Fractional HR gives businesses access to that expertise when they need it, but I think the real value is often misunderstood.
It's not about buying a few days of HR support each month. It's about identifying the issues that are costing the business money before they become bigger, more expensive problems.
So what is the hidden People P&L?
It's all the costs that sit behind poor people management. Think about the employee who leaves because concerns weren't addressed early enough. The manager spending hours dealing with conflict. The vacancy that's taking months to fill. The absence issue that nobody has tackled. The performance concern that's been discussed informally for six months but never actually managed.
Individually, those things might not seem significant. Collectively, they can have a huge impact on productivity, management time and ultimately profit.
Acas estimates workplace conflict costs UK employers around £28.5 billion each year, equating to more than £1,000 per employee on average. Whilst every business is different, those figures should make business owners stop and ask themselves a simple question:
Where is our business losing time and money that we haven't spotted yet?
What does this look like in practice?
Here's an example I've seen countless times.
A good employee is promoted into a management role and suddenly finds themselves dealing with an underperforming team member.
They don't feel comfortable having a difficult conversation, so they avoid it. A few weeks become a few months.
Other team members become frustrated. Productivity drops. The manager spends more and more time trying to work around the issue. Eventually the business owner gets involved.
By the time HR is called, everyone sees it as an employee problem. But the cost actually started months before.
What could have been addressed through an early conversation has now become a much bigger issue involving management time, frustration and formal processes.
That's where proactive People support adds value. Not by stepping in when things have gone wrong, but by helping managers deal with issues sooner and more confidently.
Can you really measure the return?
Some costs are difficult to quantify. Others are surprisingly easy.
CIPD research suggests median recruitment costs are around £1,500 for employees and £2,000 for senior managers and directors, before you factor in on-boarding time, training and lost productivity.
Absence is another good example.
The Health and Wellbeing at Work Survey suggests an average of 9.4 days' absence per employee in 2025. For a 50-person business paying an average salary of £35,000, reducing absence by just one day per employee could save around £6,700 in salary cost alone, before considering the wider impact on productivity and customer service.
Then there's formal employee relations activity. Acas estimates that management time associated with disciplinary and grievance processes can cost hundreds, and often thousands, of pounds per case.
That's why dealing with issues early isn't just good HR. It's good business.
How should CEOs measure whether HR is actually adding value?
For me, it's not about how many policies have been written or how many HR meetings have taken place.
I'd be looking at things like:
Turnover and retention
Probation success rates
Early leavers
Absence levels
Recruitment spend
Grievances and disciplinaries
Performance issues that remain unresolved
The amount of leadership time spent firefighting people problems
Those are the metrics that tell you whether people management is helping or hindering business performance.
Good HR should help improve those numbers. Good fractional HR should help you understand where the issues are, where money is leaking out of the business and what can realistically be done about it.
At FACT3, that's exactly how we approach People support. We work as an extension of the client's team, combining practical HR expertise with People data and commercial thinking.
Ultimately, HR shouldn't just be helping businesses manage risk. It should be helping them make better decisions, improve performance and protect profitability. Because the value of HR isn’t always measured by the problems it solves. Sometimes, its greatest value is the expensive problem that never happened. The conflict that was resolved early. The employee that chose to stay. The risk that was spotted before it became a crisis.