Your staff is your greatest asset. However, it can also be your greatest expense. If you're not effectively managing your labor resource, that can negatively impact productivity and profits.
Successful businesses have a management team that has learned the balance of properly managing their team and labor costs.
Managing your labor resource
Labor resource is defined as how much physical, mental, and social effort it takes to produce goods or services for your business.
It's important to track labor resources — such as managing leave and evaluating performance — to improve productivity and operations efficiency and increase your profit margin. With accurate data analysis of labor resources, you can identify areas that are costing too much and how you can implement a more productive labor plan.
Defining labor margin
Labor margin is "the difference between the cost of the labor and the revenue received from labor, expressed as a percentage of revenue."
To calculate the cost of labor per unit, multiply the hourly labor rate by the relevant labor hours it takes to complete one unit. For example, if the hourly rate is $24.75, and it takes 0.1 hours to manufacture one unit of a product, the direct labor cost per unit equals $2.475 ($24.75 x 0.1).
Having a higher operating margin for your business is better than a lower one. To continually succeed in your business, your operating margin should have a consistent upward trajectory.
Understanding payroll percentage
Payroll percentage is an invaluable metric to track. This percentage shows labor expenses compared to your sales.
You can identify your payroll percentage by calculating all payroll expenses. Then divide that number by your gross revenue. Convert that number into a percentage by multiplying by 100. It's important to use the same period of time for expenses and revenue.
A good payroll percentage is between 15-30%. However, labor-intensive businesses can turn a profit with higher payroll costs of up to 50%.
Five tips to reduce your payroll percentage
Labor costs can account for as much as 70% of your total business costs when you consider wages, employee benefits, taxes, and payroll costs.
Consider the following five tips for reducing your payroll percentage.
1. Assess payroll percentage
To start reducing your payroll percentage, you first need to calculate it to assess the current state of your business and labor affairs. Then you should evaluate labor performance.
Check trade trends to identify average salaries or hourly pay rates per variances in your industry. Calculate current labor costs for salaries, hourly wages, employee benefits, and taxes.
2. Evaluate productivity levels
According to research from Thought Works, "British business leaders do not believe their companies are fully up to speed with developing technologies — with only around 53% saying they are fully utilizing their technology advantage to win business, run efficient systems, and attract the best talent."
Evaluate your productivity levels. Identify your utilisation of technology such as point of sale (POS) software — such as Vend, Shopify, or Square — to create a streamlined customer experience and to make the retail process more effective for your labor force.
Use a retail analytics platform to track how well your business performs across all channels, especially those pertaining to sales, human resources, and inventory. With technology, you can improve the customer experience, increase sales, and effectively train your labor force so that the employee turnover rate decreases and productivity increases.
3. Increase labor retention rate
The HR Technologist reports, "Employees promoted after three years have a 70% possibility of staying with your company." Reduce labor costs by cultivating a longer employee lifecycle. With a high retention rate, you'll spend less time and money searching for new, qualified employees and won't have to invest more time in onboarding and training.
Increase labor retention rates by cultivating a positive work environment where employees are encouraged to grow and advance in their careers within your company. Offer competitive salaries and benefits while providing continual training to increase productivity levels and boost sales.
4. Create an interdisciplinary environment
It's good to train employees to specialize in specific tasks. However, if an employee is on leave, that can create a gap and reduce productivity levels.
Create an interdisciplinary environment where employees are trained in various tasks and fields so they can step in to fill gaps as necessary.
5. Integrate task automation
Evaluate current business operations and find areas where you could integrate task automation. For example, you can start using task management software to track projects, enable secured team collaboration, and increase productivity levels.
A study from KRC Research found that 53% of employers surveyed said that automation could save them 240 hours per year. You can reduce payroll percentage when you identify which tasks can be automated for the highest ROI.
Integrating task automation will take time and effort, but if you automate the right aspects of your operation, you should see good results in scaling back your payroll percentage. Set key performance indicators (KPIs) during this integration process and stay open to evaluating what is working and what isn't.
Enhancing your labor resources
Effectively tracking your labor resource — knowing who's on leave and when and monitoring your pay staff wages trend — can help reduce your payroll percentage. But understanding the value of employee recognition can help you retain your workforce. If you don't have a stellar recognition program in place, there's no time like the present to get one in place.