Labor Costs | 8 mins read

How to Reduce Labor Costs and Maintain Profitability

how to reduce labor costs and maintain profitability
Michelle Jaco

By Michelle Jaco

High labor costs slow business growth, drain budgets and even damage morale. However, the more aware you are of these impacts, the faster you can create solutions.

Simple Solutions to Cut Down on Labor Costs

As a business owner, improving the efficiency of your brand may be one of the most effective means of reducing payroll expenses. When your employees are on the clock, it's vital to be aware of what they are doing and to track performance. Here are key areas where businesses can improve.

1. Start on Time

The first measure you can take is punctuality and attendance. This goes beyond simply clocking in on time. Once your employees are on the clock, ensure they are in fact beginning the workday not socializing in the break room, fiddling around on their phones, or prepping a late breakfast. This is important to manage because it eliminates time theft, unintentional wage theft, and other issues that lead to costly overtime pay or non-work.

In order to successfully enforce company-wide participation, it is management's responsibility to clarify the rules from the start. Furthermore, solidify these policies in an employee handbook and provide each employee with said handbook for he/she to reference when needed.

The best way to log employee hours is with a reliable time clock. Through digitalization, managers and business owners can accurately log employees' hours worked, as well as track consistencies and patterns of when employees are clocking in.

2. Substitute Meetings for Memos

The cost of meetings can add up to be quite pricey. When broken down in terms of time spent multiplied by each participant's hourly/salaried rate, the company can end up spending thousands on meetings per year.

Another factor to consider is that every time your team gathers even for conference calls, productivity completely halts, taking away time from the business. In fact, in a study conducted by the Harvard Business Review surveying 182 senior managers in a range of industries, 71% said meetings are unproductive and inefficient, while 65% agreed that it kept them from completing their own tasks. So, although productivity halts, labor costs per hour does not cease.

Instead, consider distributing information via email that discloses important information without detracting from company time, and instruct all employees to confirm when they have reviewed the memo.

Of course, depending on the severity or appropriateness, still conduct meetings when the occasion calls for it but cut down when possible.

3. Update Technologies and Equipment

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Your dated infrastructure may also contribute to your employee inefficiency. Slow or malfunctioning equipment may be burning up your staff's time through no fault of their own. Every time a computer has to reboot or a POS system needs to be reset, efficiency stalls.

If your employees are dedicating time to constantly tweaking improperly functioning equipment, then it is time to consider investing in alternative options.

Understandably so, the cost to upgrade is a reasonable concern. Another rationale to consider is this- a simple tech failure could lose your business millions in minutes.

4. Rearrange and Organize the Workspace

Surprising to some, the physical setup of your business contributes to valuable time lost. A workspace that has not been thoughtfully laid out may find employees not working at a productive capacity.

For example, in an office space, placing the copier by the break room opens up the possibility for distractions, as employees may find themselves being detained by coworkers who are taking a break and engage in casual conversation in passing.

Another industry scenario pertains to the retail spaces. Because inventory is typically stored in the back-of-house, employees often leave customers unattended in order to run to the back to check on the stock of a requested item (size, color, etc.). Whenever a customer is left alone, the chance of a missed sale increases. Instead, consider placing extra stock on the sales floor near their displays, making it accessible when needed and avoiding stockouts.

While this consideration may seem minuscule, the amount of time wasted and revenue lost over the course of a working year equates to a considerable amount.

Labor Costs Shape the Way You Run the Rest of Your Business

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The more money spent on staffing, the lesser amount of revenue gets reinvested in your business both in terms of expansion and customer satisfaction.

In some businesses, lowered labor costs are a thrifty option, but this can also come at the expense of customers. For example, a smaller staff count means fewer employees to assist customers. And oftentimes, those who go unassisted become frustrated and disgruntled, taking their business elsewhere.

An increase in overtime pay multiplied by
employee wage is another result of being short-staffed, as employees are often burdened with having to work longer hours to complete daily tasks.

In that regard, the problem of crippling payroll costs can be a self-defeating cycle. The more spend on labor, the harder it becomes to help your business thrive. The more your business struggles, the harder it becomes to meet payroll expenses.

Effects of Employee Turnover

Losing employees can be a bigger monetary strain than retaining them, as high turnover rates hurt businesses in a number of ways.

According to Bersin by Deloitte, the average cost per new hire equates to a whopping $4,000. This includes the time dedicated to recruiting, conducting interviews, running background checks, and onboarding.

True Price of New Employee Training

Yes, training can be a costly expense but absolutely necessary when attempting to work with a depleted roster. The cost may vary significantly depending on a wide range of variables, including but not limited to

  • The size of your business
  • The method of training
  • The skills you are trying to teach
There are several factors that are common to virtually every business, such as managerial time and productivity loss.

During the hours of training, a significant portion of management's time becomes dedicated to onboarding and training of new hires. Consequently, revenue-generating responsibilities may fall to the wayside.

Another factor to consider when it comes to turnover is how the current team is affected. When falling short-staffed, efficiency becomes a growing concern, and labor costs increase, and this expense festers the longer the position remains unfilled.

The domino effect doesn't stop there; staff morale also weakens. Because the remaining team members must inadvertently work harder to produce the same results a full roster would, individuals can begin to experience fatigue, stress, and depression all of which lead to more turnover.

Overcoming Employee Turnover

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Smart hiring is the best way to ensure that employees stick around long-term. The concept behind smart hiring revolves around recruiting employees with the proper skillset and experience, as well as the right personality traits and characteristics that would mesh well with company culture.

Recommendations to attract top talent include offering

  • A competitive salary
  • Standard benefits, like medical/ health benefits, and dental
  • Paid time off (PTO)
  • Paid sick days
  • Employee discounts on meals (if you're in the food industry) or products (if you're in the retail industry)
  • Incentivized prizes/pay bonuses when goals are exceeded
  • A clear description of the job position and expectations
Where reasonable accommodations can be made, it might be in your best interest to allow for them.

As phrases like work-life balance and company culture become increasingly valued in the public lexicon, one thing is clear, employees are looking for a work environment that respects their personal needs.

Managing these areas will improve employee retention.

Reduce Staff Cost and Consider Alternatives to Hiring

Looking into cutting labor all together? Depending on your industry, outsourcing could be a viable option for your brand. A surprising number of positions can be filled remotely, a process that also comes with a wide range of cost-saving benefits, like

  • Not paying for additional office space and materials
  • Reduction of worker's compensation needs, as employees are now working from home
  • Bringing on a wider range of talent, outside of your business' standard metropolitan area
  • Reducing medical benefits costs by hiring temp. employees versus hourly and salaried employees
Some examples of positions that can easily be outsourced include marketing and content creation, customer service, accounting, data entry, and technological services, like IT.

Through evolved technology, much of the workforce can be executed remotely.

Update Your Software Infrastructure

Your business may run more smoothly all around with updated digital infrastructure. Automation and data collecting software pay dividends in the long run, saving you money, and perhaps even more importantly, time.

There is also effective scheduling software, POS technology, and even HR platforms that handle employee relations and information sharing in a digital capacity.

A robust digital interface isn't just for the tech-savvy anymore. Your software can be integrated and consolidated to ensure that all of your digital resources interact smoothly.

Consequently, these resources also work to alleviate payroll concerns. The time you and your staff used to spend on more time occupying tasks such as scheduling, or inventory management can now be dedicated to more lucrative endeavors.

Even small businesses can benefit from a good digital interface. Consider updating your software for long term savings on payroll, and general day to day operations.

Wrapping Up

No matter the strained labor costs put on your business, your staff is ultimately there to support you. The better you can manage time and expense, the easier it will be to get back the mutually beneficial relationship between the employer and the employee.

Labor costs don't have to slow growth and put a strain on the health of your business. Through strategic thinking and time management technology, you can keep your staff and your business at peak performance.