Employees are the backbone of small businesses. So, it makes sense that labor is often one of the largest expenses for companies in the growth stage. Businesses require manpower, so they pay to bring in the right people.
However, as small businesses expand beyond that growth stage and sales begin to decline, labor costs can (and often do) skyrocket. To combat this issue, many small business owners resort to staff reductions or layoffs. But that can harm the customer experience.
Luckily, the Small Business Growth Alliance (SBGA) has many strategies that small businesses can adopt to reduce labor costs without harming the customer experience.
Labor: The Most Controllable Expense
The first step to controlling labor costs is recognizing that it’s an entirely manageable expense. Small business owners don’t have to let things get out of hand—they just have to be proactive. That means directly monitoring hiring, scheduling, productivity improvements, and overtime.
It’s also critical to measure the demographics of your customer base, their satisfaction, and their level of activity in buying your service or product. By monitoring customer behavior, you can align your staffing to meet their needs.
What is Labor Cost Percentage?
SBGA also recommends that small business owners be aware of labor cost percentages. This unique number measures the portion of revenue spent on staff by dividing total labor costs by gross sales. To maintain a profit, most companies aim for a labor percentage between 25–35%. (Certain factors, however, might drastically increase labor cost percentage, including significant overtime or low or stagnant sales.)
It’s also important to note that certain businesses inherently have a higher labor cost percentage. For instance, restaurants and other businesses that rely on service naturally pay for more staff. So a 35% number might not mean the end of the world.
Six Aspects of Labor Costs to Control
To get on top of labor costs, SBGA stresses the importance of monitoring various areas of your business. Let’s assess each of these areas individually to see how they can be optimized.
1. Assess Labor Demand:
First and foremost, small businesses must forecast the labor they will need. Certain tools and technologies can be integrated to analyze indicators such as weather, holidays, historical sales, and various economic trends. This allows businesses to anticipate demand and alter staffing accordingly.
2. Cross-Trained Staff:
While businesses certainly benefit from having specialized roles, things can crater quickly if those specialists fall ill or leave their positions. For this reason, it’s beneficial to cross-train employees so they can handle multiple roles. This also enhances the customer experience, as customers will have several knowledgeable and familiar faces to interact with.
3. Avoid Overtime:
One of the easiest staffing snafus to avoid, according to SBGA, is overtime. Although an hour here and there might not seem significant, it adds up over the long run and inflicts serious financial damage. The key to avoiding overtime rests in our next trait.
4. Scheduling:
Perhaps the most vital staffing aspect to manage is the schedule. It’s what makes or breaks many businesses, and it’s where added costs are gained or lost. Do you have the appropriate number of people working each shift? Is anyone working overtime or clocking in early? Does your staff align with customer demand and your allocated budget? What is the exact cost of staff per shift? These are questions to ask and numbers to consider. Integrating scheduling technology that enables you to monitor staff costs and efficiency is highly recommended by SBGA.
Employee turnover remains a costly challenge for small businesses, with replacement costs often reaching tens of thousands of dollars per employee when hiring, training, and productivity losses are factored in.
5. Reducing Turnover:
Turnover is a significant hindrance to both overall costs and customer satisfaction. Each new staff member must be trained, and the onboarding process often costs thousands of dollars. Moreover, customers like coming back to businesses with familiar faces. So, establishing a healthy, respectful culture at your business simultaneously reduces costs while building client trust.
6. Review Compensation Levels:
While a hefty salary is certainly a big draw for many employees, it’s not all you have to offer. Before raising wages or salaries to untenable levels, signal to the job market that you offer a healthy work–life balance, advancement opportunities, a friendly, balanced work environment, and rewarding work.
A Final Note on Labor Costs
It’s crucial to remember that labor costs can get out of hand quickly. You want to offer better service to your clients, so you hire more staff. Before long, you’re paying for more than you initially expected.
For that reason, the SBGA recommends continuous monitoring of staffing costs. Review your turnover rates, keep a close eye on scheduling and overtime, and ensure staff are cross-trained and that you promote a healthy, resilient workspace. If you can polish these aspects of your business and maintain a strong labor cost percentage, you’ll be able to keep earning a profit while satisfying the demands of your clientele.
About the Small Business Growth Alliance (SBGA):
Small Business Growth Alliance (SBGA) is an organization founded by experienced small-business owners dedicated to helping entrepreneurs grow with confidence. With nearly two decades of expertise, SBGA connects businesses with trusted partners and cost-effective solutions that streamline operations, reduce risk, and support long-term success.
