Hi. My name is Candice and I am a human resources strategist and today we're going to talk about labor costs. Oh labor costs. Labor cost is the amount of money that your business is spending on labor divided by the amount of revenue that you're generating. That's a pretty simple calculation. Sometimes getting all the data that you need for it is intense, but generally labor cost is so important to track.
It probably goes without saying that as a business owner, you want to be careful about the amount of money that you're spending on your labor and making sure that it's affordable for you and rewards your employees well, and all of those things. It can be helpful if you're in business for a number of years to track your labor cost in a few different ways. The first way is to track your labor costs on a monthly basis. That just shows you in January, this was my labor cost, this was the revenue, this was the labor and there it is.
You can track year over year what that labor cost is and how it changes as your revenue grows. If your labor cost is too low, and you're seeing a lot of pain points in the organization, that could be an indication that you need to start to develop new positions either management positions or coordinating positions, or entire new departments, depending on what's going on.
If your labor cost is really high based off of the revenue [00:02:00] that you have, and that is going on for a while, or you see a spike, then it could be a time to think about how you're organizing your labor and how you are bringing in new business, and either find the ways to generate more business or find the ways to decrease the cost and the labor.
There are a few different ways to go about doing that without having to lay people off but it is important to keep a close look on your labor cost and see how it's increasing and decreasing over an annual basis. Another way to look at labor costs is by project. If your company has a project-based model and you have teams that work on projects and they're allocating their time towards those projects, you can track the labor cost that's project specific. Then you would be using the revenue from that project and not from the whole business in order to calculate that labor cost.
Labor cost, it's a diagnostic tool that can be used to understand the health of the organization. Generally, if you see extremely high labor costs, there are stresses that are happening on the organization that are due to those high costs. Generally, if you see very low labor costs, you have the same thing, but it's manifesting in other ways. I hope that helps you understand a little bit about labor cost and the ways that you can use it to track the health of your business and know when you might need to be adding positions or decreasing hours. Thank you.
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