Are Your Labor Costs Out of Control?

out of control labor costsAccording to statistics from the U.S. Department of Labor, labor costs are one of the largest expenses any company has to absorb.  In the retail industry, they average roughly 10%-20% of total revenue – even more than the cost of inventory on hand in most cases!  Other industries, including the food and hospitality fields, may see that percentage rise as high as 30%.  In many cases, the cost of labor is second only to the cost of real estate.

Keep in mind that although these huge figures are just averages, it’s not uncommon to see individual instances race even higher.  For small businesses, labor costs can gobble up earnings in a heartbeat if risk factors aren’t actively monitored and adjusted.

How to Calculate the Labor Costs

It’s not enough to simply look at your payroll.  In order to get an accurate sense of your total labor costs you must view labor as a percentage of sales.  To calculate this, simply take your total revenue from sales and divide it by your total payroll, being sure to include the cost of any benefits packages your company offers as well.

With this figure in hand, compare your results to the averages described above and see if you’re paying too much.  A solid goal to shoot for in retail (durable or non-durable goods) is 10%-15%, while in the restaurant industry, 20% is considered “safe.”

What Drives Labor Costs So High?

Despite what you may think, hiring more employees won’t have a huge effect on your labor costs as a function of sales.  That’s because it’s not your hourly wages that are driving your labor costs sky high.  It’s the overtime.

The Bureau of Labor Statistics’ annual reports show that one of the largest contributing factors to increased labor costs is overtime accrual.  For example, in 2010, retail and wholesale employers in New Jersey shelled out over $227 million in overtime.  That accounted for 4.6% of total statewide revenues for the entire year.

Many retailers and restaurateurs are forced to pay time-and-a-half wages or even double-time to employees who work over 40 hours in a given work week.  Even salaried employees may be eligible for overtime rates if they work in excess of average hours, depending on how employee contracts are structured.

How to Decrease Overtime and Deflate Labor Costs

With all of this in mind, how can you avoid overtime and keep your business running smoothly?  Essentially, there are two effective ways you can kill overtime expenses:

Ensure Accurate and Adequate Staffing

Making sure that you have enough people on hand and in reserve to handle the amount of business you’re doing and to cover emergencies such as sick calls is an important part of preventing excess overtime.  Of course, being able to do this hinges on your ability to compile accurate predictions of your company’s sales and production on a daily – and even hourly – basis.

Once you have these predictions in place, examine your schedule to ensure that you have just enough employees available to handle that load. Don’t have a good way to access or edit the work schedule? Use an employee schedule maker.  If not, consider rescheduling or even hiring part time employees to fill in the gap, rather than relying on overtime hours as a “cure-all.”

A few other things you can do to cut overtime expenses include:

  • Keeping an up-to-date tally of how many hours your employees have actually worked – not just how many they’re scheduled for.  This will allow you to spot potential overtime offenders before it becomes a problem.
  • Restricting early in-punches and late out-punches.  Even incremental overtime can have a dramatic effect on your labor costs.
  • Being unafraid to cut shifts if your daily business doesn’t support your current staffing load.

Improve Employee Efficiency

Corporate offices and retailers around the world have been moving away from rigid job descriptions to more flexible plans, which allow for a certain amount of employee overlap.  This cross training can allow a limited number of employees to accomplish more and eliminates both down time and excess overtime.

For example, if your hostess can jump in if a server goes home sick; she can keep diners happy without adding extra payroll.  Likewise, if a cashier can stock shelves during slow times, your stock people can move on to other things or punch out early.

Regular performance evaluations and employee advancement programs also function as motivational tools to encourage employees to give and learn more.   Merit-based raises and performance bonuses are a great option as well, but even something as simple as an extra day off per month or the chance to advance within the company can be motivation enough to get the extra cooperation you need.

Constant and detailed monitoring of your company y’s staffing needs and performance are essential for cutting labor costs.  Effective scheduling is the most powerful tool at your disposal, but it’s important to put personal relationships aside.

As an owner or manager, your first responsibility is always to the business.  That doesn’t mean you have to be hard or impersonal, but bowing to the will of your employees will always complicate matters.  Educating them about their own importance and offering them the chance to help grow the business – rather than simply collect a paycheck – can be effective tools for increasing productivity, decreasing labor costs and mitigating any conflicts that may arise. 

Are Your Labor Costs Out of Control?