One of the highest costs in business is labour. While your business is growing, it can be easy to justify labour costs to keep up with demand. But as business matures, sales level off and it’s not long before labour costs get out of hand, causing considerable strain on your business.
At this point lot of business owners and managers quickly turn to reducing staff numbers to curb costs. But rather than simply cutting staff, there are a variety of better ways to reduce labour costs and improve efficiency before you downsize your workforce.
12 ways to reduce labour costs
#1 Avoid overtime
The first way to improve your efficiency in labour costs, is to avoid overtime.
A little overtime here and there may not seem like a lot, but even small amounts on a regular basis, with a larger workforce can quickly add up.
With pay increasing at rates like 1.5 to 2 times the regular pay, it’s important that you take overtime rates into consideration, minimising its impact on your business.
Here’s an example of how it can add up with just five staff:
| Employee | Pay rate | hrs/ week | Total | Overtime hrs | Overtime pay | Sub total | Grand total | Overtime Grand Total | Difference | % difference |
| 1 | $19 | 24 | $456 | 3 | $85.50 | $541.50 | $21,888 | $25,992 | $4,104 | 18.75% |
| 2 | $22 | 32 | $704 | 0.5 | $16.50 | $720.50 | $33,792 | $34,584 | $792 | 2.34% |
| 3 | $27 | 40 | $1,080 | 3 | $121.50 | $1,201.50 | $51,840 | $57,672 | $5,832 | 11.25% |
| 4 | $19 | 16 | $304 | 2 | $57.00 | $361.00 | $14,592 | $17,328 | $2,736 | 18.75% |
| 5 | $22 | 24 | $528 | 1 | $33.00 | $561.00 | $25,344 | $26,928 | $1,584 | 6.25% |
| Total | $2,800 | 4.5 | $3,385.5 | $147,456 | $162,504 | $15,048 | 10.21% |
| Calculations: | |
| Working weeks | 48 |
| Overtime rate | 1.5X |
It’s easy to see that if you had ten staff, $15,048 could easily turn into $30,096 or more. Of course, if you’re earning additional income during that overtime, it can be worthwhile. But more often than not, overtime costs you more without additional revenue.
If your staff are struggling with workload, consider another part time staff to better handle the workload and service your customers better, or improve processes (which we’ll go into next).
#2 Streamline processes
Like overtime, small changes to streamline processes can build up to make a significant difference. The aim of your business (at least in terms of how processes are concerned) is to become a well oiled machine, most effective at achieving its outcome.
If someone is completing a task more than twice, it needs to be put in writing so that it’s developed as a process and there are clear lines of responsibility and management.
This doesn’t mean people have to be micromanaged, but too many business owners and managers try and handle everything themselves, wasting time on less important tasks, manual methods and juggling competing priorities.
Staff end up wasting time on repeating tasks unnecessarily, and time gets taken away from more important tasks that actually grow the business.
Process improvements are often found in purchasing and handling stock, store/restaurant design and layout, customer service, payments, accounting – almost any area of the business. The key is in understanding priorities (what impacts revenue, costs and morale), then finding:
- The most appropriate method to doing something,
- The most appropriate person, and
- Systemising things as much as possible.
This might include accounting software, customer service software (for eCommerce for example), POS software or rostering software like Ento.
#3 Review levels of compensation
Most employers believe that high salaries are the best way to attract talent. It’s important to remunerate your staff fairly, and paying extra can help to attract talented people, but more often than not money is not a motivator, and talented people are drawn in by more than just money.
Ensuring your company offers interesting and challenging work, a mission to believe in, and a great working culture that offers growth, a balanced work view (with flexibility), and recognition for their work, is what will drive your business to new heights and make everyone’s lives more enjoyable.
#4 Reduce staff turnover
Following on from staff motivation is staff turnover. We all know that cycling through staff is expensive.Even if you recruit internally, there’s time and money in recruiting, interviewing, training and bringing productivity up to speed.
If your business is turning over staff within a 3 month basis you definitely need to assess the working conditions and culture of your business (this excludes seasonal businesses of course).
If you haven’t stopped to assess it, on average, it costs a hospitality business at least $3,300 AUD to hire a new staff. So if you’re doing this on a 3-6 month basis, you can expect to pay at least $6,600 in recruiting costs for a single role.
That’s a significant amount considering the money could be spent on stock, or systems to increase revenue.
If you need some direction, here are some steps to improve staff retention:
- Have a clear onboarding process
- Assess staff regularly
- Develop professional growth and training
- Conduct company climate surveys
- Promote a healthy work environment
- Give staff recognition, autonomy and flexibility
- Develop a strong company vision
- Keep your staff informed, and
- Pay your staff competitively to take money out of the equation.
#5 Cross-train staff
Having specific, specialist roles in your business are important. They allow staff to understand their responsibilities,keep your business efficient and competitive.
The downside of having specialist roles for everyone is that when someone isn’t available, or they leave, other staff can’t complete the task causing problems in your business.
This also becomes a problem if you’re employing specialists, but their duties aren’t yet critical to the business. While you ramp up workload, you’ll be bleeding money to keep them employed.
To mitigate the risk on both parts, consider cross-training staff and sharing the workload. Most staff will enjoy the learning/growth, and provided roles are clear, it won’t end up affecting the productivity of the team.
#6 Allow flexible-working
The working life that many people have has changed significantly over the past twenty years. Staff value flexible working conditions more than ever, and in many cases this can be very beneficial for a business.
Flexible working conditions can not only help improve the morale and productivity of your staff, but it also helps to mitigate overtime – especially for businesses with long trading hours or irregular working times outside the typical 9-5.
If you see seasonality in your business, flexible working arrangements can also allow you to scale with seasonal demand, rather than wearing the cost of additional staff while business is lower.
The key is to measure your current workload and staff, understand the critical tasks and employ people appropriate to the work that needs doing when.
Retail & hospitality
For those in retail and hospitality (and anyone with sales really), it’s important to understand your demand curve of sales and roster accordingly. If you have more sales on a Monday, but it decreases over the week you can schedule more staff for Mondays and reduce staff numbers for the remainder of the week.
The same applies to public holidays, seasonal times like Christmas and local events.
Staff rostering systems that can integrate with POS systems and weather forecasts will help you to better predict and manage this process. Obviously the more data you have in your system, the better you will be able to predict your demand curve and roster accordingly.
#7 Reduce conflict
Having the wrong team members, or the wrong culture can significantly impact the productivity of your workforce. If team members aren’t getting along, time is wasted in arguments, staff minds are caught up in conflicts and motivation is low.
Having clear company culture, open communication and the right staff all help to reduce conflict, helping to keep the business running smoothly.
If your staff are having conflicts, make sure you get onto it quickly, rather than hoping it’ll sort itself out. Stacking up of little annoyances is what typically leads to flair-ups between staff, rather than one off large occurrences.
#8 Pay in commissions
No one wants to stress about the security of their job. It leads to fear based behaviour and poor decisions. Paying sales people with a based wage and commission bonus however, can ensure that you pay staff in relation to their ability to perform, keeping labour costs lower.
#9 Reduce or reevaluate perks
Perks can be a great way to motivate staff cost effectively. It can develop culture, attract talented staff and keep staff engaged.
If you’re spending money on perks that don’t add much value to any of the above, however, it may be spent better elsewhere. Discuss this with your team and assess whether an alternative would be better, saving costs and keeping morale high.
#10 Automate and outsource non-critical tasks
In every business, there are things that can be done easier, quicker or cheaper. Many staff and managers spend their time on tasks that could be better automated or outsourced, despite the additional cost.
Again, understanding the priority of work, the value it provides and the time it takes is key to improving efficiency. If you’re spending three hours a week cleaning the workplace, surely that three hours could be better spent chasing up stock, hiring new staff or talking to customers. It might cost you $75 to have the workplace cleaned, but you may well have increased revenue by $300 during that time, and your stress could be considerably lower.
Make a list of all the tasks that you do on a daily basis. Break them down into critical and non-critical tasks, then work out which tasks you need to do, and which can be done by someone else. How much could you save outsourcing or automating it? And how much could you increase revenue by focussing your time on critical tasks?
#11 Review procedures
In many businesses, what used to work as a smaller company no longer works at scale.
If you haven’t reviewed your processes since your company has grown, assess whether they’re still serving your business or whether they’re holding you back from scaling your business.
#12 Reduce staff
Last but not least, if you’ve implemented a range of efficiencies and your business is still haemorrhaging money, it may be time to cut staff numbers.
Each business goes through cycles from infancy, toddler, and teenager, to maturity. If your business has grown but is struggling to reach new levels, it may be time to cut down on staff, pivot, innovate and rescale.
Just ensure that you’re making changes to the way you do business, otherwise, you’ll face the same challenges you did, each time you reach the same stage of business.