Effective Ways to Manage Labour Costs for Your Business
Business owners need to carefully budget every aspect of the costs of running a small enterprise if they want to stay viable. One of the major factors to consider when planning your business expenses is what your labour costs will be. If you employ even just one staff member, then this can considerably impact your cash flow.
To ensure that you stay within your budget, it is important to know exactly what labour costs are, how to properly calculate labour costs and what you can do to reduce these expenses. No matter what industry or sector your business is in, managing labour costs is crucial to maintaining a healthy bottom line. Take a look at our quick guide to learn how you can more effectively manage the labour costs associated with your business.
What are labour costs?
Any business that hires employees will need to be aware of the associated labour costs involved. The labour costs of a business are the total amount that is spent on its employees, this includes their hourly pay and all benefits, taxes and insurance costs.
You can divide labour costs into four categories:
- Direct labour costs – Any cost that relates directly to the act of production, for example, pay for workers that produce car parts in a factory
- Indirect labour costs – Any cost that is not directly related to the act of production, for example, the receptionist that works in the car parts factory
- Fixed labour costs – These are any costs that are not likely to change for a given period of time, for example, the annual salary of the manager of the car parts factory
- Variable labour costs – These are costs that have the potential to fluctuate in the short term, for example, the hourly pay rates of the car parts factory workers
How to calculate labour costs for your business
When calculating labour costs all four categories must be taken into account. This way, you will arrive at a true figure and not just the total of what you might pay your employees in wages.
There are three steps to accurately calculating the labour costs involved in a business:
- Calculate your employee’s gross payments – Multiply the number of hours the employee has worked by their hourly rate
- Calculate any additional costs – Add in any other costs, for example, overtime, sick pay, payroll taxes, retirement contributions, insurance costs and so on
- Add these amounts together to determine the true labour costs
This formula can be used to determine what the average labour costs are for your business in any unit of time, whether that is a month, a quarter or a year. The data gained from determining the true cost of labour can help you to better plan a budget for your operating costs.
The advantages of reducing labour costs
Most business owners want to see that their employees are fairly compensated for their work and feel valued and appreciated. However, labour costs can add up to more than 30% of a business’s total revenue. In times of economic difficulties, it is sometimes the case that tough decisions have to be made.
Cutting back on staff can decrease productivity, lower business earnings and impact overall morale. Rather than having to let a staff member go, there are ways you can reduce labour costs and thus increase savings, boost your profits and ensure your staff stay in employment.
How to reduce labour costs for your business
To avoid having to cut the number of employees in your business, you can follow the below suggestions to lower your overall labour costs:
- Reduce the amount of overtime you pay your employees
- Ask staff to accept a small pay cut in order to keep everyone on
- Avoid pay rises by incentivising staff with perks like flexitime
- Reduce the hours of your staff
- Offer staff members the chance to take unpaid leave
- Focus on rota planning to maximise sales during busy times and decrease staffing during quiet periods
Staying in control of all the costs associated with running a business isn’t easy. Aside from your labour costs, there are start-up costs like registering a company and ongoing costs such as market research and paying off your business loans. That’s why Mooncard developed a payment card system that you can use to keep track of all your business expenses.
With Mooncard, every time you make a purchase connected to your business, the receipt is recorded digitally by the purchaser and an expense report is automatically created and sent to your accounts department. Mooncard really does make it simple to pay, manage and track all your business expenses.
You can request a free, no-obligation Mooncard demonstration online. Try Mooncard today!