For most businesses, labor is the biggest cost in the income statement. Fortunately, it is also one of the most controllable costs. But unfortunately, it’s a cost that most businesses have a hard time controlling.
What makes labor so hard to control? There can be many factors, but several are common to most businesses:
1) Volatile revenue cycles: For businesses whose revenue swings wildly from month to month or season to season, it’s a challenge to hang on to trained staff during the down cycles. If they are laid off, new staff has to be trained when business picks up. If they are not laid off, the cost of carrying the extra payroll becomes a significant financial burden.
2) Gradual staff increases: This is one of the most insidious causes of bloated payroll. Often, there is the dynamic of staff increases combined with people trying to look busy to justify continued employment. This is a situation that not only causes low productivity, it also causes general employee dissatisfaction.
3) Sacred Cows: These are usually long-time employees whose skills have not kept pace with the business, but they have been kept on the payroll for historical and loyalty reasons. In the worst cases, they are promoted to positions for which they are not capable, and it is often necessary to hire additional staff to overcome their shortcomings. It can feel good to keep a Sacred Cow on the payroll, but it can be one of the biggest expense leaks there is.
The above reasons are only a partial list. If you want to get the most profit out of your business and increase its value, you must be diligent in controlling payroll costs. A basic principle in making this happen is having clarity of the value that your labor dollars bring back to your business. A baseline requirement of obtaining the clarity if having quality internal financial reporting. The usually involves breakdowns of labor among products, departments, and lines of authority. It also involves keeping fixed labor costs down to a minimum.
To discuss ways to get the most out of your payroll dollars, visit my website at www.scottbogartcpa.com, or call me at 805-377-0405.