When I started my small business after a career in sales and marketing, I wanted to be fair to my employees so I kept them working rather than sending them home when we had no billable work for them. Later, I learned as a small business consultant how to increase profit: you control your labor costs.
It was easier, frankly, when I looked as an outsider at what was chewing up profits for my small business clients. It was so common to find waste in labor hours that when I got on a new job, one of the first places I would check to find savings was in their payroll.
The Key Costs Used in Labor Burden Calculation
First off, I would gather all of the figures to calculate labor burden. The key figures were the following:
- Labor rate & hours worked per week
- Overtime rate and average hours of overtime per week
- Other compensation, like incentives and allowances
- Taxes & Workers Compensation costs
- Benefits, like insurances and company contributions to retirement plans
- Uniforms, gas / mileage, gifts, company parties and picnics
For instance, my $14.00 per hour technician cost me $18.43 per hour even though we offered almost no benefits. But by the time you add in vacation, 6 holidays, 2 sick days, 2 @ 15 minute breaks daily, and 2 hours downtime for travel, his rate jumped significantly. When I factor in that only 80% of his time was productive, we were actually paying him roughly $33.20 per hour.
If I adjust for more realistic travel time daily of three hours because of border crossing and where our customers were, his rate jumps to $40.58 per hour. It was not unusual to pay for 4 or even 5 hours of travel time. As most of our service calls were contract work, we couldn't bill the customer for travel.
How Do You Determine Hours to Cut?
For this reason, I wrote up a recommendation for one restaurant client to cut back hours on their slow days. How I determined the hours was to look at the following:
- Income by hour
- Subtract cost of goods sold (COGS) from the income to get gross profit per hour - before labor
- Burdened labor cost by hour
- Identify the gross profit by the hour (income - COGS - labor = gross profit)
This approach works for any industry I can think of. In the case of this one client, I recommended he cut five hours per day three days a week from their schedule to save $9,900 annually in labor cost. That's a savings of almost 1% on a $1,000,000 business. For the typical small business, a gain of 1% is significant.
There are times you may stay open even at a loss because of other business considerations. For instance, a 24 hour quick stop on a major interstate has to be available at all hours. You might also need to be available so are ready for a priority order. Just be sure that you make a good business decision, not an emotional one when it comes to paying people to sit around.
As you can see from these examples, one answer to how to increase profit for your small business is to manage your payroll. When possible, send employees home if you have no work for them or cut your business hours. Small savings add up, especially when looked at over a year's time. You can manage a profitable business.
More from this contributor:
- Small Businesses