Reducing labor costs in your business is a touchy subject because it directly impacts your employees. The subject must be tackled with clear communication, compassion, and consideration.
Before jumping straight to cutting staff members, consider other ways you can cut back on labor costs, like reducing turnover, shortening your workweek, and improving workflows.
16 Ways to Reduce Your Small Business’s Labor Costs
There are many different ways to reduce your company’s labor costs. As a business owner, it’s up to you to determine how to maintain a healthy profit margin while balancing the needs and expectations of your employees. It’s important to explore your options before making any decisions that will impact your staff members’ employment or compensation.
1. Review Compensation
Reviewing compensation doesn’t necessarily mean you need to start reducing staff salaries. Instead, it can mean reevaluating how you compensate your staff in the future.
For example, if you typically offer annual raises, this year you may want to offer performance bonuses, additional vacation time, flexible hours, or remote work options instead. Although these aren’t the salary increases your employees may hope for, they’ll likely be met with more enthusiasm than a wage decrease or a round of layoffs.
These types of compensation won’t increase your year-over-year spending and holds salaries the same. Plus, staff members will still be compensated for their performance, even if it’s not in the way they expected.
You can even give your employees an option. For example, you can offer employees either additional vacation time or a performance bonus determined by their ability to meet a certain goal.
2. Reduce Turnover
If you have high turnover, you already know it costs you a lot of money. It takes a lot of resources to find, hire, and train a new employee, and the more frequently you have to do it, the higher your turnover costs.
Fortunately, you have at least some control over employee turnover. Steps you can take to reduce employee turnover include:
- Have a comprehensive hiring process
- Offer competitive compensation
- Provide opportunities for growth
- Monitor employee motivation and engagement
- Understand why turnover has happened in the past
- Offer a healthy work-life balance
Not only do long-term staff save you money in turnover costs, but they’re also well-versed in your business and industry, improving their efficiency and productivity. Focus on hiring high-quality employees and build your perks and benefits around what matters most to your staff members to keep them happy, satisfied, and engaged.
3. Hire Well
Hiring well is a great way to reduce turnover, and also comes with other cost-saving benefits. By hiring the right staff members for the job, you’ll get employees who are better qualified and more effective when it comes to job performance.
Although experienced candidates may cost you more upfront in terms of salary, their productivity and efficiency will be worth it, especially when compared to the training costs associated with showing inexperienced hires the ropes.
Putting more time and effort into hiring and employee retention ensures the staff members you do add to your team are right for the job and that they have the know-how and skills to hit the ground running. Well-suited staff members are more likely to stick around — meaning less money spent on replacement costs — and tend to be happier, more effective employees.
4. Cross-Train Staff
If your business has tasks that can be done by anyone, train everyone to do them. Cross-training staff ensures your business’s most vital tasks get taken care of even if someone calls in sick or hands in their notice.
Cross-training helps your business to run smoothly and can save you from costly delays or oversights. For example, if all of your staff members know how to process wholesale orders, big orders can be taken care of when they’re requested, not when one key person comes back from vacation.
Cross-training also means your staff members can be productive at all times, not only when there’s a customer who requires their skill set.
While this approach won’t work for specialized tasks or positions, it does come in handy for basic, day-to-day duties that keep your business running smoothly and turning a profit.
5. Cut Down Your Workweek
Shorter workweeks are becoming more and more common, with some businesses opting for fewer workdays each week and others choosing fewer hours per day. How you approach it is up to you, but less time spent in the office or at the shop means less money spent on labor expenses.
Consider offering a reduced workweek as an option to staff members. You may be surprised by how many of your employees choose work-life balance in exchange for a slightly lower salary.
6. Hire Part-Time Workers and Temps
Part-time and temporary workers only work when you need them to, whereas full-time staff get paid for full-time hours regardless of whether you have work for them to do. For new or replacement roles, consider hiring part-time employees or temps to save money.
Not only will you save on labor costs through hourly wages, but you’ll likely also save on benefits and other staff expenses depending on how many hours your employee works and what you provide.
7. Restructure Fixed Salaries
Restructuring fixed salaries sounds more ominous than it really is. Instead of simply reducing your employees’ salaries, which will cause disengagement, demotivation, and even turnover, consider offering performance bonuses and commissions instead.
This ensures staff members are only paid additional amounts when your company is profitable.
For example, let’s say you have a salesperson who has a base salary as well as a 5% commission on the sales they make. Ask them if they’re willing to take a lower base salary in exchange for a higher commission, like 10%. Tha
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