5 Tips For Reducing Labor Costs In Your Business

how to reduce business labor costs

When it comes to reducing costs, most business owners think about things like rent, utilities, cost of goods, marketing, or advertising. But have you ever considered that your biggest savings might come from labor? 

Tips For Lowering Labor Costs This Year 

If your business is like most, it’s been a struggle to make ends meet over the last couple of years. Challenges from a global pandemic combined with shifts in the marketplace have made it increasingly difficult for small businesses to remain competitive. But by cutting costs, you may be able to create some breathing room. Here are a few ideas: 

1. Improve Employee Retention Rate 

Employee turnover is extremely costly on many fronts. So it should come as no surprise that one of the best things you can do for your bottom line is to improve your employee retention rate. 

According to a report by Employee Benefit News (EBN), it costs employers roughly 33 percent of the worker’s salary to hire a replacement if that individual leaves for another job. That comes out to roughly $15,000 for an employee earning $45,000 per year. Then there are the indirect costs of lost productivity and damaged workplace morale. 

If you have five employees earning a median $45,000 salary leave your company each year, that means you’re spending somewhere around $75,000 on hiring alone. That’s a huge drain on your balance sheet. Thankfully, 75 percent of the causes of turnover are preventable. Start investing time and creative energy into keeping employees happy and fulfilled! You won’t regret it. 

2. Review And Adjust Compensation Plans 

At least once per year you should gather your company’s executive team and discuss the topic of compensation. Study the current compensation plans you offer employees and look for ways to restructure and adjust (if necessary). 

For example, you could consider switching your sales staff to commission-only. (Or you might adopt a strategy where they receive a base + commission for the first year and then 100 percent commission thereafter.) Another option is to switch a couple of roles from full-time to contractor status or part-time as a way of saving on health care coverage and other benefits. 

You’ll obviously have to weigh the pros and cons of any changes you make, but a couple of strategic shifts may help you save thousands over the long run.

3. Outsource the Right Tasks 

Certain tasks should always be handled internally. This includes core tasks related to innovation and sales. But not every task needs to be handled in-house. Other things like copywriting, social media management, customer service, manufacturing, accounting, and even logistics can be outsourced to other companies, freelancers, or contractors at just a fraction of the price. 

4. Pursue Digital Transformation 

Is your team still doing everything manually? Do your employees spend the majority of their time doing time-consuming administrative tasks that could easily be automated? You might want to look into digital transformation. 

Digital transformation is an intentional strategy that overhauls your business processes via information technology and automation. 

“A digital transformation strategy also moves your company away from time-consuming analog processes to lightning-fast digital ones,” Box explains. “From sales and marketing to logistics and human resources, every part of the organization feels these changes and sees processes improve — from product development to employee onboarding.” 

Once digital transformation occurs, it becomes easier to pivot your business model. For example, you might finally be able to move out of your expensive commercial office space and transition to a 100 percent remote team. This could save you tens of thousands of dollars per year (while also increasing employee satisfaction) without office expenses. 

5. Reduce Overtime 

If your compensation plans allow for employees to earn extra by working overtime, it would behoove you to reevaluate. Consider the value that these overtime hours are adding and contrast them against the additional pay you’re forking over. It’s possible that you could actually be spending more than you’re benefiting. Reducing (or even eliminating) overtime is often a good option. 

Where Can You Save On Company Labor? 

Most businesses can save anywhere from a few hundred dollars to a few thousand dollars per month by simply rethinking their labor costs. Whether it’s taking proactive steps to reduce turnover, implementing the right digital transformation, or reducing overtime, savings opportunities abound. It's time to cut company costs and power up your profit margins!

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