Labor expenses increase in any business that is not stagnating. You might even be thinking that it is fine to start spending more money since your business is growing. However, growth does not have to be synonymous with increased spending. There are several reasons you might be throwing your hard-earned money out the window, but all those reasons can be reduced to one—a poorly optimized work process screaming for improvement.
Ignoring constantly growing labor expenses will inevitably result in money lost, stunted growth, and business stagnation. You will be losing money and not progressing toward your business goals. So it is vital to keep your labor costs in check.
Why Do My Labor Costs Grow?
Too many employees
If you have more employees than you need for your current state of business, you are bound to drown in labor costs that can be easily avoided by optimizing your work process. There might be people doing the same task at opposite ends of the company when only one specialist will suffice. Or maybe you hired a lot of staff to get through a bottleneck, and now you are overstaffed. Regardless of the reason, too many employees raise labor costs significantly.
Overtime abuse
Overtime abuse might be another pit you are throwing your money into without even realizing it. People check in early and check out late, sometimes to beat the traffic. They may be reporting excess work hours just to be compensated at a time-and-a-half rate. If no one is approving overtime hours or performing analytics on how many excess hours people report monthly, your labor costs could skyrocket as though you have twice as many people working for you.
Sick days are not tracked
If sick days are not tracked and compensated as full working days, you are not only losing money but you may be violating labor laws and jeopardizing your business.
Overstaffed shifts
Shift imbalance is one of the biggest problems businesses encounter. Without proper analytics, you do not know what shifts are overstaffed and what shifts could use more people. If too many employees are assigned to a shift, some of them may not even be working because there is only so much work that has to be done. So you are paying some employees for idle hours when their skills might be used on another shift where people are struggling to get the job done.
Employees working only in one department
If your working resources are spread unevenly and your departments have little communication with each other, you might lose the overall perspective of your business. You might start hiring new people even though you already have available staff who just need to be redirected to another department. As a result, you end up overstaffed with rapidly growing labor costs.
No workforce analytics
When there is no workforce analytics, there cannot be proper labor budget planning. In the absence of data on your departments, on employee productivity, on workloads, and on cost of wages for the previous period, you are left guessing what the future may bring both financially and in terms of employee management. The absence of detailed budget planning inevitably leads to a loss of money. You can read more on workforce planning and why you need it here.
No work tracking
Labor law compliance audits require a lot of effort to pass. If you do not have exhaustive reports on each employee who works for you and their work history, you are going to run into problems with the audits. Millions of dollars are spent on fines each year because companies fail to gather enough data on their employees and their business processes.
How Do I Lower My Labor Costs?
Time and shift tracking
The first tool you need to invest in is a high-quality time-tracking system. If your process is based on employees’ work shifts, the software should be tailored accordingly. Employees should start and end their shifts during designated periods of time so the system can calculate how many hours they work in a day and then in a month. Work hour analytics and detailed reports for each employee and each department will allow you to balance your workloads and take advantage of the resources you have at hand. We developed such a system for one of our clients, and it is producing amazing results in terms of organizing the work process.
Labor budget planning
The second investment you need to make is a labor budget software that will take into account all your sources of income and all your expenses and perform exhaustive analytics so you can see exactly how the money in your business is flowing. It will allow you to plan ahead and reduce budget leakage and avoidable expenses.
Overtime abuse control
You also need to set up an overtime policy that spells out what is considered overtime hours. Introduce an approval procedure where a responsible manager has to approve employees’ excess hours in order for them to be considered overtime.
Labor tracking
Labor tracking will give you a lot of data so you can compile personal reports on each employee and every department in your company. That, in turn, will help you pass labor compliance audits, avoid fines, and save you a great deal of money.
Establish cross-department communication
However different your company’s departments might be, they should know what people in other departments are doing. It helps employees get their bearings regarding the general state of the business they work for and see new opportunities for their talents.
Assign employees to multiple departments
After you establish cross-communication among departments, it will be easier to balance their workloads by assigning employees to different tasks in different departments. Cross-train those interested in broadening their horizons and utilize employees who can already perform a variety of tasks in multiple divisions of your company. It will save you a great deal of money since you now have trained in-house stars who are able to work in different areas of expertise. Just be careful to balance their workloads as you offer them different tasks they might be interested in. Make sure the workforce management system you are using can handle employees assigned to different departments and still correctly track their hours and calculate their wages.
Prepare for your peak seasons
Some businesses—hotels, restaurants, companies that cater to tourists—have a seasonal workload increase. If you fall into any of those categories, you know that it’s best to hire part-time workers to get through the bottleneck of a seasonal overload. That significantly cuts your labor costs since you won’t be overstaffed when the heat dies down.
How Do I Impement a Cost Reduction Strategy?
In the modern business era, automation is key. Business processes have become multi-faceted and complex. They require calculation, data gathering, and report generation in order for business owners to guide their companies into a bright and financially safe future. Battling overtime abuse and growing labor expenses is not easy, but it is necessary in order for your business to be a stable player in your industry. A high-quality workforce management system will undoubtedly make your business process much more organized and productive. See a labor cost reduction strategy in action here