You begin accruing labor costs before you even hire your first employee. Now that we have established why getting an accurate read on your labor cost matters, here are six categories of expenses you need to factor into your labor cost formula. Monitoring spending trends in these areas can also help you flag potential fraud. Some examples include employee cell phone usage, company vehicle mileage and hiring costs. Labor costs should be considered alongside the cost of goods sold when you are deciding how much to charge.įinally, calculating your labor costs help you pinpoint revenue leaks that are eating into your earnings. If you overestimate labor costs, you will set prices that are too high and will not be able to compete in the marketplace effectively. If you underestimate your labor costs, you will set prices that are too low and wind up with margins that are not feasible to stay in business. Knowing your labor costs helps you set optimal prices, which maximizes your profits. With this number in mind, it is much easier to work out how many full-time and part-time employees you can afford to bring onboard, rather than guessing. Using a labor cost formula gives you a precise dollar figure for what every hour of labor directly costs your organization. In the best case scenario, this ends up hurting profits, and in the worst case, results in having to lay people off. You would not sign a contract for a new office space without doing the math to see if you could afford the monthly rent, right? Likewise, you should not hire a new employee before you fully assess whether the benefits of hiring them will outweigh the financial cost.Īs companies grow, many run into trouble when they overestimate their staffing needs and underestimate the true cost of labor.
LOST IN RANDOM COST HOW TO
Here, we will talk more about the importance of knowing how to calculate labor cost thoroughly and accurately and give you a reliable breakdown of every expense you should factor.
This also includes payroll taxes, benefits packages, and the other expenses associated with employees like space and equipment.
LOST IN RANDOM COST FULL
This is part of the labor cost formula, but your true labor cost includes the full range of expenses associated with attracting, onboarding, training and retaining your employees. While calculating labor costs may seem straightforward, many businesses take an approach that is too narrow, merely accounting for the cost of employee wages. You cannot properly price your goods or services if you do not know the cost of the labor associated with producing them. Without this intel, it is impossible to accurately project your current and future hiring capabilities. If you do not have a reliable labor cost formula, there is no way of knowing how much each additional employee actually costs your organization. For government workers, that number jumps to $52.45 per hour.
In March 2020, the average non-government worker cost employers $37.73 per hour worked. Specific costs vary by industry, but in most fields, it accounts for around 60% of total expenses.
Knowing how to calculate labor cost is essential if you want to run a profitable operation, since labor is by far the largest expense most businesses face.
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