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by Jen Leigh on February 17, 2019

Tracking Labor Costs to Improve Profitability - The Basics


If profitability is a metric you're struggling to boost, labor costs could very well be your culprit. They're notoriously difficult to measure. As Paul Graham, founder of Y Combinator, once famously said, "What is measured, improves." Only by tracking your labor costs can you correctly calibrate your cost of goods and services, and if you're tracking them incorrectly, you may be worse off than if you had no data. In either case, you will be unable to cut overhead and allocate your human capital where it is most profitable. Here's a look into the ins and outs of accurate labor calculations.

Why track labor costs?

Labor costs vary from industry to industry, ranging from under 10 percent in categories with high automation such as oil refineries, to over 60 percent in a labor-intensive business such as long-haul trucking. Given the percentage of total outlay, closely tracking this data can reap considerable rewards, regardless of how challenging it may seem.

First and foremost, if you're moving from a lack of accountability to tracking labor for the first time, you're bound to see improvements because employees will know that they're being tracked. This isn't a matter of Big Brother looking over their shoulders and certainly should not be positioned as such; it's a matter of your team taking pride in their work, with perhaps a few performance incentives thrown in.

Consider the data you receive from your tracking system as an opportunity to top your performance on a day-after-day basis with the accompanying visualization of labor costs to back it up. This data will provide the capability to pinpoint where you're most efficient and where you need to improve. Bloated processes can be identified in real time so you can shift workers to ensure that they are spending time on the most profitable tasks.

The Basics of Tracking Labor Costs Correctly

Managing labor doesn't have to be difficult or costly. As with most things in life, knowledge is power, so the key to getting a handle on one of your business's highest expenses lies in keeping just a few things in mind.

  • Know the formula for tracking labor costs. One formula is at the heart of calculating your labor percentage: Total cost of labor in dollars/revenue in dollars x 100 = Labor cost percentage. If you're operating a business with a point of sale system that features an integrated time management component, this system may already be calculating this percentage for you. Maybe all you need to do is a little digging in the manual or help screens to unearth the data you need.
  • Break down jobs into small tasks. While there's seldom a need to apprise clients of the many small jobs that go into completing their project, from the standpoint of providing accurate estimates as well as identifying inefficiencies, it's essential to break down a larger job into its parts. Coding these jobs-within-a-job in a way that makes sense for your company and your workforce will provide an easy and streamlined means of data visualization on a move-forward basis and ultimately also play a role in forecasting completion timelines.
  • Mobile time clock apps. Mobile solutions can be a tremendous asset in gaining a clear picture of labor costs, especially if you have a business with many field employees or an organization with manufacturing employees distributed around a sizable shop floor. These solutions integrate with existing enterprise planning and management systems, allowing employees to track their time remotely. This saves time wasted in transferring data back and forth from timesheets and time management systems or eliminates the need to travel to a time clock or desktop computer to log in and out, and otherwise reduces systemic errors. Additionally, by their nature, they can monitor efficiency in real time, which can be a tremendous asset in tweaking profitability.

What to Do with The Data You Get

Data is only as good as what you choose to do with it. If you're going to be satisfied with some pretty charts on the computer and some numbers you can point to when asked by your accountant, then you will be dramatically underutilizing your labor cost information. Here are much better ways to apply your new knowledge:

  • Reconcile labor against production. Are you capturing all of your labor costs - both direct and indirect? With this data, you'll be able to quickly identify gaps and determine if the profitability numbers you've compiled without this data have been as accurate as you thought. For example, time logged in payroll but not accounted for in the labor cost system is time you're not capturing. Where is that time going, and to what projects does it need to be attached? Should that time be chalked up to overhead? Now, your cost of goods numbers and your overhead projections will be much more accurate.
  • Rethink schedules as necessary. If your business is service-oriented, you'll soon be able to spot trends in scheduling that can enable you to adjust workflows. Perhaps your business is seasonally oriented, or maybe there are times of the day when your manufacturing workforce is more efficient than others. Don't be constrained by what's traditional in your category; instead, use your data, in combination with employee feedback, to overhaul your schedules to conform to maximize efficiency and profitability.
  • Play to your strengths. Though it may require a more anecdotal assessment, chances are your labor data will also reflect your employees' strengths and weaknesses, both on an individual level and as a whole. Use this information to confer with your team and redistribute them to satisfy their wants and needs, thus improving employee engagement while also boosting your bottom line.

While tracking your labor costs may require an investment of your time on the front end to get organized, being able to effectively monitor this substantial cost will enable you to reap countless rewards. Check out our cloud-based time and labor software solution to learn more. 

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Jen Leigh

Jen Leigh is a Senior Product Specialist with Inflection HR's Cloud Based HR and Workforce Management Solutions. Connect with Jenni and the rest of the Inflection HR Team on Twitter, Facebook, Linkedin, or Google +.