How to Cut Back on Labor Costs in Your Organization

labor costs

Did you know labor costs can consume up to 70 percent – or even more in some cases – of a business’s operating costs?

While this demonstrates that workers are an indispensable part of doing business, if you’re spending too much on the cost of labor, you won’t turn any decent profits. This is why many business owners and leaders are cutting back on what they’re spending on labor.

But what are the most effective ways to ensure labor cost reduction? Read on as we flesh out a handful of strategies your organization can implement.

1. Have a Clear Picture of Your Labor Costs

How much is your business spending on wages, benefits, and other workforce-related expenses? If you’re like those business owners who don’t have an exact figure, it’s not easy to reduce the labor cost – let alone get wind of when it’s threatening to spiral out of control.

For instance, start by getting a breakdown of your organization’s labor expenditure in the last year. Divide it by your total operating costs (or gross revenues) in the same period and multiply by 100 to get the percentage. Now you know just how big an expense labor is.

2. Create a Cost Reduction Goal

Do some research and establish the standard rate in your industry. For example, suppose you’re in the restaurant industry and the average labor cost is 40 percent of gross revenues, and your restaurant is spending 70 percent. In that case, your goal is to cut back to the industry average.

Alternatively, you create your own goal, depending on how you want to run the business. For example, if your business is in the growth phase and you want to keep labor expenses below 50 percent of your operating costs, that will be your goal.

3. Trim Your Workforce

A bloated workforce is one main reason many businesses struggle with ballooning labor costs. If your company has more workers than it needs, that’s where your cost reduction operation should start.

Conduct an audit of your workplace operations and establish the workforce size needed to maintain organizational efficiency. Although it can be hard to let redundant workers go, running a cost-efficient is all about making difficult decisions.

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4. Automate Workflow Processes

Perhaps you’ve audited your operations and can’t seem to find any redundant roles. Or maybe even after trimming your workforce, you’re still above your labor cost target. What to do?

Workflow automation can help.

Several business processes can be automated. Good places to start include payroll and accounting, customer support, and employee onboarding. After successful automation, you won’t need employees for those roles.

Learn about workflow automation and how it can help your business.

Reign in Your Labor Costs

Workers are the lifeblood of every business, but you shouldn’t spend beyond your means to keep them. As a prudent business owner, you must keep your labor costs at a minimum. With this guide, you now know how to go about it.

Explore our blog for more small business advice.

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