Are Your Labor Costs Eating Your Profit?
September 12, 2019
While setting salaries, payroll frequency, and processing – whether outsourcing or in-house – are important topics, it’s also important to look at the big picture and determine whether or not labor costs are eating up your profit. Labor costs, which can account for as much as 70% of total business costs, include employee wages, benefits, payroll or other related taxes.
Sure, you’ve got a certain set of tasks that need to be handled to keep your business moving forward and finding the balance between operating efficiently and being overstaffed can be easier said than done. However, taking a close look at your labor costs today can not only put more money in your pocket, it can remove the stress of constantly trying to make ends meet.
Know Your Payroll Costs
Regardless of what type of business you have, it’s a pretty safe bet that your payroll expenses account for the largest percentage of your revenue. To know for sure, take your total gross revenue and divide it by your total payroll – including benefits. The number you come up with are your labor costs.
While there’s no “one-size-fits-all” number for the percentage of revenue that should go towards labor costs, knowing where each dollar is going can help you better manage and control your margins.
Overstaffing can be hard on your wallet in one way (overpaying staff), understaffing in another (underserving clients/customers). That’s why it’s crucial to optimize your schedule and make sure you’re running a tight ship 24-7. Time and attendance software can help you monitor attendance and compare schedules versus time worked for your employees. This information helps you better manage your scheduling now and in the future.
Cross-training is a great way to fully maximize staff hours and allows you to shift labor to another task if someone call in sick or takes time off. This may also allow you to effectively absorb a vacant position in-house, and not have to hire a new employee. It’s not just a win from a labor cost standpoint, your employees will also be learning new tasks and adding to their range of professional skills.
It’s expensive to hire and train new employees. If you have a lot of turnover, you may also notice several indirect and invisible costs including poor quality, longer production times, waste, and the need for more oversight. Building a strong team and keeping them is key when it comes to managing labor costs.
Outsourcing is a good option when you have back-office functions that are complicated in nature, and the size of your company is preventing you from performing them at a consistent and reasonable cost. As your business needs change and grow, outsourcing can save you time and money, and allow you to let go of some of the details and focus on building your business
Bottom line, your labor costs don’t have to eat your profit. When you take time to step outside of the day-to-day and look at your labor costs in relation to your profit, you can adjust accordingly, and strengthen your bottom line.