Your employees are the lifeblood of your business. However, labor is also typically the highest cost for most businesses. Costs associated with hiring, training, compensating, retaining, rewarding, and managing employees can easily spiral out of control when there is no labor strategy in place. This may result in the need for layoffs or pay cuts, which can have disastrous effects on employee morale, performance, and retention.

Top Strategies for Managing Labor Costs

Proper management of labor and benefits expenses can be highly beneficial to the long-term success of a company. In this article, we will explore some ways to keep these costs under control so employees stay happy—and the business stays profitable.

Consider the True Cost of an Employee

When hiring an employee, there is much more to consider than just salary and benefits. Creating a job description, advertising the position, reviewing applications, interviewing, and checking references all take time and cost money. In many cases it is also necessary to check credit scores, vet criminal histories, do drug tests, negotiate salary and benefits, and more. All this takes someone’s time and attention away from other productive work. Other expenses may include relocation, equipment, software, office furniture, and supplies.

Once the employee is hired, there are costs associated with training and bringing the person up to speed in the job. As time passes there are raises and bonuses to consider. There may be additional expenses such as travel and entertainment, depending on the position.

Standardizing hiring practices and setting budgets in advance can save time and make the process easier and less expensive. It also makes things fairer for existing employees.

Explore Options Besides Full-Time, Salaried, In-House

The Covid-19 lockdowns forced many companies to get creative and find ways to continue the business with employees working from home. If this is an option for your enterprise, you may find that it saves money on office space, equipment, supplies, and travel. It may also expand your candidate pool by allowing you to hire employees in remote locations who are unable or unwilling to relocate.

Another thing to consider is whether you really need a full-time employee to do the job, or whether it could be done by someone working part-time, thus eliminating the need to offer benefits such as health insurance. This also opens a vast talent pool of single parents, semi-retired individuals, and others who may have great skills and experience but are unable to work a full-time schedule.

If the workload is variable or seasonal, a temporary employee or an independent contractor might be the best answer. An additional alternative is to outsource the job to an agency that specializes in the field or provides fractional employees.

A third option to consider is job sharing. Hiring two or more part-timers instead of a full-time employee can not only save money but provide additional expertise and insights.

Automate Where Possible

Upon examination, many businesses realize that highly paid employees are spending their time doing manual tasks that could be done better and more quickly through hardware or software automation. Whether it be factory assembly work, financial record-keeping, product design, software development, or any of a hundred other tasks, there is often a way to speed things up and save money by automating part or all of the process.

Of course, it is necessary to evaluate the full cost of automation—including hidden costs such as maintenance, inspections, larger utility bills, and more—to determine the lifetime value of an automation and whether it makes sense for your situation. Many companies find they can save money and reduce their headcount requirements through strategic automation.

Avoid Paying Overtime Wages

Sometimes unexpected circumstances such as a sudden surge in demand make it necessary to ask non-exempt employees to work overtime. But in most cases, overtime work is due to poor planning or setting unrealistic deadlines. Paying employees 1½ times their usual hourly salary (or more) can be a heavy financial burden to the company.

While exempt employees generally do not need to be paid extra for overtime work, it can add to their stress level and decrease their job satisfaction if it happens too often. Overwork is a frequently cited reason for employees leaving their jobs.

Through proper planning and financial forecasting, companies can have temporary help or outside resources in place to handle seasonal increases in demand and other foreseeable fluctuations.

Put the Right People in the Right Places

Poorly trained, poorly motivated, and poorly qualified employees tend to be poorly productive. Sometimes employees are put into positions where they don’t really fit when they could be much more valuable to the company in other roles. This often happens when an employee who is good at a particular job gets promoted to a management role without having management skills. It also happens when a key employee leaves and that person’s workload is assigned to someone else who either doesn’t understand the role or is too busy with other duties.

While it is sometimes necessary, it can be expensive and possibly risky to fire or lay off an underperformer. There may be severance payments involved and there is always the risk of retaliation or legal action if the person feels unfairly treated. Greater diligence in the hiring process, as well as ongoing training and frequent monitoring of productivity, can help prevent or mitigate issues.

Training and mentorship can sometimes solve the problem, but in cases where it doesn’t, a lateral transfer to a position where the person feels comfortable and competent may be an appropriate answer. If an inadequately performing employee can be rehabilitated through training or reassignment, it can be much less expensive than firing the person and making a new hire.

Be Creative with Benefits

As the cost of traditional employee benefits such as health insurance continues to rise, it makes sense to explore other options for maintaining worker satisfaction without breaking the bank. For instance, you could offer performance bonuses rather than annual raises. Allowing certain employees to work flexible hours or fewer workdays could be a powerful incentive to them that costs you little or nothing.

New alternatives to traditional health insurance plans are being introduced all the time, so it makes sense to periodically check for options that save you money while maintaining a reasonable level of coverage for your employees.

Seek Financial Advice

If your labor and benefits costs are becoming a concern, you may wish to seek professional help from a financial advisor. There may be ways to offset these expenses by enhancing operational efficiencies, reducing the cost of supplies, increasing prices, or other means. An experienced financial expert may also be able to recommend ways to increase profitability without increasing staff.

In Summary

Having productive, satisfied employees is essential to business success. But the cost of hiring and retaining those employees can be onerous. There are many things you can do to keep employee satisfaction and company profits in balance. To learn more, we invite you to contact Preferred CFO and speak with one of our financial advisors.

About the Author

Curtis Bigelow


Curtis is an experienced finance professional with 20 years of experience serving public and private companies in a variety of industries including SaaS, healthcare, and  manufacturing.


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