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How to Manage Labor Costs When Rebuilding your Business

November 17, 2021
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How to Manage Labor Costs When Rebuilding your Business

It’s no secret that business owners worldwide have been struggling to deal with the lasting effects of the pandemic. When Covid-19 was at its peak, companies of all sizes and industries had to adjust rapidly to stay afloat. While several businesses stayed open for their essential services, the vast majority of companies had to either go on hiatus or shut down entirely. 

Now that the pandemic restrictions are starting to lighten and most companies have returned to in-person work, new challenges have presented themselves. Two, in particular, have made the most significant impact. 

The first challenge that has recently come up for business owners is the challenge of “The Great Resignation.” This ongoing event, labeled a labor shortage by some and a social justice movement by others, has seen millions of US workers quit their jobs in the last year. Thanks to this movement, plenty of companies are trying to recruit new employees in order to regain their staff. 

If your business isn’t trying to attract new employees, then there’s a good chance the human resources department is trying to figure out the second significant challenge; labor costs. If you didn’t already know, labor costs amount to the sum of all wages paid to employees, as well as the cost of employee benefits and payroll taxes paid by an employer. Put simply; it’s the amount of money that a company is “investing” in its employees.

Labor costs have never been easy to calculate, but considering the current events that most business owners are facing, they have become significantly more challenging to manage. Thankfully, LACOSTA is here to try and provide as much help as we can!

We’ve put together a couple of tips that could potentially help a business get back on its feet and retain employees simultaneously. While we can’t guarantee that these tips will lead to success, they should at least help anyone understand the factors at play when it comes to labor costs.  

Labor Costs: The Basics

To make sure everyone is starting on the same page, here are a few things that would be helpful to know when it comes to labor costs. There are two types of labor costs, indirect and direct. 

Direct labor costs are all costs that can be traced back to actual production from the company. For example, if your company produces baseball bats, the cost of an employee that physically makes the bats and runs the machines would be an example of a direct labor cost.

Alternatively, indirect labor costs refer to how much an employer pays for labor unrelated to production. This could be in the form of security for the office building, janitorial teams, and other company duties that don’t lead back to the primary production process.

Labor costs can also be fixed or variable, meaning that some costs may remain the same over time (fixed), while other costs will change based on the influence of other factors (variable). Naturally, these aren’t the only factors that go into labor costs, but they are arguably the most influential.

Managing Your Labor Costs

When trying to determine the best way to reduce labor costs, most business owners’ first instinct is to reduce the salaries, hourly wage, and the number of employees

This is not a good idea! 

If you ask most of the workers who voluntarily left their jobs this year, many will list their salaries, hourly wage, or work expectations as the main reason. In short, choosing to balance your labor costs at the direct expense of your employees isn’t a very practical way to run a business. 

Properly balanced labor costs will still prevent you from losing money while still managing to have a happy and efficient workforce. Instead of trying to take the money away from your workers, consider trying one of these tips!

Training and Internal Improvement

Often, business owners are quick to cut into hourly rates and labor hours because that appears to be the quick and easy way to get new, better labor. However, studies have shown that hiring a new employee simply to replace a fired one can cost the business thousands of extra dollars. 

Instead, businesses should invest in the best available resources and training programs for their current employees. Though there is an initial expense that comes with putting these resources into place, the productivity of your employees will more than make up for the one-time cost. One properly trained and experienced employee is arguably more valuable than three or four inexperienced new hires. 

Efficiency, Productivity, and Scheduling

Before beginning the path to reopening your business, consider doing a labor cost analysis of your business. There are tools such as labor cost calculators that can help you with this and even employee cost calculators if you want to get into the nitty-gritty. Once you analyze where all of your costs are coming from, you can likely improve a few areas! 

For instance, overhead costs (rent, insurance, utilities, etc.) can play a big part in your overall labor costs, and figuring out how to reduce your overhead can go a long way towards saving you money. Similarly, inefficient scheduling can make a surprising dent in the actual cost of running a business. If you can optimize your schedule, you can keep employees happy with minimal changes in paid time while lowering the company’s total cost!  

Adjust Expectations and Observe    

Finally, we’d recommend taking a moment to research, observe, and better understand the current economic situation. Many business owners are racing to reopen their businesses so that they can “return to normal.” The unfortunate reality is that we will likely never see that “normal” again. The pandemic has brought fundamental change to many areas of our society, and the ripple effects will spread much further than people may realize. 

Rather than trying to build back a business from before the pandemic, most business owners would benefit from taking a moment to better understand how things are changing. The Great Resignation didn’t just “happen,” it had been building for a long, long time. As younger and newer generations continue to enter the workforce, there will inevitably be significant changes that businesses must adjust to. 

LACOSTA, Labor, and You

The business world is ever-changing and can be challenging to manage on your own. Thankfully, there are some things you don’t have to take upon yourself, especially with LACOSTA around. We have provided top-quality janitorial and managed labor services to various industries for over 30 years, and we don’t plan on stopping any time soon. 

Reach out to us today to learn more about a LACOSTA partnership, or check out our blog for more business tips!

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