What Are Your Labor Costs & How to Manage Them

Business Owners Can Better Understand Their Costs to Enhance Their Profits. Learn More With Lindner Properties

Running your business can be complicated, especially if you’re a first-time business owner who is just getting started. You can read all the guidebooks and consult with other business owners, but the best, and scariest, way to learn about operating your business is through experience. One new experience business owners often come across is managing their labor costs. These are expenses associated with your employees or contract workers and they can get muddled if you’re not keeping good track of everyone’s hours, wages, and additional benefits.

If you’re struggling to understand your labor costs and you need help, turn to Lindner Properties. Not only are we commercial real estate experts who can help you find your ideal business location, but we also have decades of experience helping business owners navigate opening their first store, restaurant, or service-based business. Get expert advice that’s easy to understand and even easier to implement!

Learning the Basics of Business Labor Costs: What Are They, How to Calculate Them & How to Make Adjustments to Your Bottom Line

To make things easy, we’re going to follow two imaginary businesses! First, we have a new restaurant that just opened a few months ago to rave reviews. Second, we’ll look at an office that recently moved to a larger location to accommodate their growing team of in-office workers. Each business will need to understand and manage its labor costs, but how it calculates and modifies its costs will be different. This is because every business is unique and your labor costs can change depending on the type of workers you employ. For each business, we’ll need to understand what labor costs are before we can start outlining how the businesses are different from each other. Let’s get to it!

Defining labor costs & what is included in the total

In short, labor costs are what your employees pocket at the end of the day or benefit from. They will include the employee’s wages, the taxes that are taken out, such as social security, and any additional benefits you pay for. Benefits include insurance, retirement, and any added perks you provide, like gym memberships, healthcare savings accounts, pet insurance, and more. Small businesses like a new restaurant or growing office may not provide perks like these yet, but they could come in the future, so they are important to keep in mind when reviewing your bottom line.

Now that you understand what labor costs are from a general perspective, it’s time to think about the variations in labor costs. It’s not all wages, taxes, and benefits. Labor costs are actually different from employee to employee, and we’re not just talking about paying people on a scale based on skill level or tenure. Lindner Properties is here to help you understand direct and indirect labor and how those costs matter to your bottom line.

What is the difference between fixed labor & varied labor?

When the office gets their monthly delivery of printer paper, they always pay the same price because they have a deal with their supplier. This is a fixed cost they pay monthly. When the restaurant buys fresh produce and meat, the price fluctuates based on the market value of the product. This is a variable cost they have to anticipate and cover. It’s somewhat similar for each business’ labor costs.

The office has salaried employees who work 40 hours a week to accomplish their tasks or meet their goals. These employees receive identical paychecks each pay period and they always know how to calculate their personal expenses thanks to this reliable income. The restaurant, on the other hand, employs hourly workers who earn a different amount every pay period. They may have longer or shorter hours, or customers may be more generous with their tips one weekend over another. These are variable labor costs. While they are less predictable, they are not better or worse than fixed labor costs.

Variable labor costs may also include seasonal employees who are only brought in to help during busy seasons. This will often apply to retail shops or seasonal service businesses like lawn care companies. As the employer, it’s important you know how your employees are paid, what type of labor cost they fall under, and if this will vary between pay periods. If you don’t have an in-house accountant who can handle this for you, sit down with your business accountant to learn more about the labor costs of your business.

The difference between direct labor & indirect labor & how they impact your total labor costs

Direct Labor

At the restaurant, waiters, waitresses, culinary staff, and hostesses all contribute to the direct labor of running the business. They serve customers, cook food, and perform tasks that contribute directly to the profit-earning potential of the restaurant. The office also has workers who contribute to the profit-earning potential of the business. The sales and marketing team work with clients to deliver work. A service-based company like a pest control business could say the same about their exterminators. All of these employees provide direct labor. Their work (or labor) directly results in business income.

Indirect Labor

No business can run without support behind the scenes! That’s where indirect laborers come in. This could be restaurant managers who oversee scheduling and employee satisfaction or HR professionals who handle payroll, interoffice management, and much more. Even though these employees aren’t participating in production of goods or services, they are ensuring the company, and its employees, stay afloat. Even the company owner could fall under this category! This is indirect labor.

Without indirect labor, the direct laborers wouldn’t have the support (or deserved wages) they need to handle their direct tasks. Without direct laborers, the indirect laborers would have no one to support!

Look at your employee roster and think about how each person's role is designed. By breaking your labor costs down in this way, you can learn if your budget concerns spring from service labor costs that are too high, or internal operating costs are going over your budget. If the restaurant is spending more on direct labor than it’s making, then it’s time to raise prices. Talk to your accountant about your direct and indirect labor costs, and see where you can start making changes to enhance your profitability.

You know what labor costs are, but how can you calculate your labor costs? 

Unless you’re an accountant, you probably thought you left your math skills behind in high school. Unfortunately for anyone curious about labor costs, it’s number crunching time! Pull out your pen and paper (or calculator, we won’t tell) and get to business.

Calculating your labor costs is easy. Just add employee wages to the total cost of benefits, taxes, and other expenses paid out to employees, and then divide this number by the number of hours worked. The same math will apply to fixed and variable costs, as well as direct and indirect labor. Variable costs and indirect labor may require a bit more estimating, but if you’ve already been in business for a while, it shouldn't be difficult to come up with an average or estimate of those costs.

Wages + Benefits / Hours Worked 

Since you now know what your labor costs are or what they could be, it’s time to consider how they affect your bottom line. Let’s take it back to the restaurant. If the restaurant owner finds they are making a small profit, they probably want to increase their margins. No business owner wants to spend all their hard-earned money on operating costs when they could be making improvements to their existing model! The restaurant owner has a few options for high labor costs. They can let a few employees go, but this isn’t great for morale or reputation. They could also raise prices on their food. However, drastic price hikes could scare loyal customers away. Another solution would be to add a small charge to all bills to cover certain labor costs. This is becoming a more common practice nationwide, but it’s not always appealing to customers. No matter what, maintaining a good reputation and earning a profit is paramount for business owners, so be sure to consult with a business professional or trusted peer before making big decisions.

When labor costs are low and profits are high, business owners can turn those profits around and reward their employees with raises, bonuses, or other non-monetary benefits. Giving back to your team will inspire loyalty and hard work, so why not spoil them a little with well-deserved rewards? That’s how you manage labor costs successfully.

Grow your business in a larger space with competitive commercial leasing opportunities from Lindner Properties 

Now that you’re a labor cost pro, it’s time to think about how you can take advantage of the profit that remains after taking out your labor costs. If your business is booming and you need to grow your team but don’t have the space, turn to Lindner Properties! We have plenty of available retail, restaurant, or office rentals in mid-Missouri or Destin, FL. The affordable leases and well-maintained properties are the perfect place for ambitious business owners to grow their operations and support their team. To book a tour at one of the featured properties or to consult with one of our commercial real estate experts, reach out today!