CONTROLLING LABOR COSTS
Most businesses have two major costs. One is the cost of goods sold (COGS), and the other is labor expenses. Which do you think is the most challenging to control? If you said labor, you have either been in business a long time, or have some genuine insight to the challenges of running a business.
Labor issues are still one of the major concerns of most business owners and managers. Outside of direct labor costs, Cost of Goods Sold can be held in check through price adjustments, changing vendors, purchasing efficiencies, & costing controls. On the other hand, labor costs cannot necessarily be controlled by lay-offs or paying low wages.
First of all, if operations are paying less than the going rate for a particular position, you may find it difficult to hire and retain the more productive employees. As business owners and managers, we need to remind ourselves that the two most important groups of individuals affecting our business’s success are both the customers and the employees. Therefore, both must be given the same respect and appreciation. Yet managing labor costs and performance should be a top priority for all companies.
Employee Wages
Labor costs cannot be controlled by just paying low wages. Paying less than the going wage rate in your location will make it difficult to hire and retain the employees you really want. Think about it. If you felt you were a great cook, mechanic or accountant and were well compensated for your efforts, would you quit your current job and go work for someone who paid you less than you were making? I don’t think many of us would work for less. It is not unusual to find low productivity in businesses where low wages are paid compared to a similar job in the same area. Productive employees will go where they will be better compensated for their skills and abilities. About one-third of all employees who quit, leave for better paying jobs. The cost of rehiring and retraining employees could end up costing you more in the long run. There is an easy solution to this problem.
The first step is establishing a reasonable base pay. Once a basic base pay has been established, you can then implement a performance and bonus paid program. Just increasing the wages of an employee is not a good indicator for increased productivity, but when money is used as a reward for outstanding performance, it can be an effective motivator. The new pay program can become a win-win situation for both the employer and the employee. If the employee performs, they will be compensated and the business will make more money. If they don’t, the company is not required to pay them more than their base pay. This gives the employee an incentive to increase their performance and stay with your company if they have the potential to make more money than they could elsewhere.
Using a Schedule
Labor costs can be controlled through sound scheduling. When you put a schedule together, you’re not really “scheduling” people, but rather “purchasing” the potential to do work. A large number of companies have a tendency to schedule more people than are actually needed. This is either because of the fear of being short-handed, or they have too many employees and they feel obligated to pay them enough to keep them around just in case. The only reason you would need to schedule an additional employee is because certain work needs to be done and that person will be able to do the required job. For example, you have 6 buses scheduled to be in for breakfast, but your 2 cooks can only handle 4—therefore, you would need one more cook to handle the load.
There are a number of scheduling methods you can use that will reduce your labor costs. For businesses that schedule shifts, one way is to adjust when you have employees arrive and depart from work. This method is used in reflection to the different business volumes that occur during the day. For businesses like construction companies, assign each employee to work on specific project or job. That way, you have more control over your employee hours. Your main goal is to accomplish the necessary workload with a minimum number of labor hours without sacrificing your level of service for the customers or clients. This process requires a detailed budget and good scheduling.
If you have finished putting the amount of people you need in the schedule and realize that not every full-time employee is receiving their 40 hours, you may have too many employees. First, create an employee budget with the help of a good accountant to make sure labor percentages coincide with a controlled percentage of normal monthly sales. Second, schedule your full-time employees to make sure they are getting their 40 (or other requested) hours in. Third, evaluate the schedule to see what other positions need to be filled if any that correspond with daily peaks and valleys. With restaurants for example, if all other positions are filled, then that means you may only need 1 to 3 rotating part-time on-call employees for the “just in cases,” or to fill in when another employee needs time off. If every position is not yet filled, schedule your more productive part-time employees to fill the remaining needs. If you have more than one left over, you have too many. Remember scheduling part-time employees requires their full commitment.
Increasing Employee Productivity
When trying to determine the productivity of your staff, the ratio of “payroll to total sales” is not an effective and accurate measure of worker productivity and scheduling efficiency. The ratio shows a composite of wages from all departments and workers as it relates to sales volume. Management can track and measure performance using a variety of methods. One of those methods includes the use of score cards. The use of score cards is a great way to help track and measure performance in each area of your business. You can also figure out what you need to know just by looking around you, asking questions, and using common sense.
Improving employee productivity is one of the best ways to get the most for your money. The more productive an employee is, the more profitable you will be. You can also increase productivity through training, better systems/processes, and the use of labor-saving equipment.
A great way to improve productivity is to cross-train your employees. Cross training will help both your employees and your company increase daily performance. A construction company for example can utilize his Foreman by having him train each employee as he himself works on the construction of each job. Rather than having the Foreman and five other manager standing around to watch one man dig a hole while discussing if they should let him go to reduce labor costs.
In restaurants, cross training is essential to its growth and performance. Your staff should be able to fill in just about anywhere at any given time to help, especially supervisors and managers. If a waiter can help greet customers, cook, and buss the tables when it gets busy, then why schedule another employee? By cross training your employees you can cut costs without sacrificing customer service.
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