How to Reduce Labor Costs in Your Business

How to Reduce Labor Costs in Your Business

As a business owner, the ability to deliver a product or service economically hinges directly on how efficiently you can bring your service or product to the market. By trimming costs in your labor and delivery budget, you can effectively lower prices to consumers or increase profit margins.

Reducing Labor Costs

There are several ways to cut employee costs while still maintaining a productive workforce.

Use temporary agencies. These services work by hiring individuals as their employees, and then “leasing” them to you for a fee (usually a percentage of their hourly wage). The benefits of using such a company are that they handle all payroll and human resources issues, and some even offer benefits programs to their employees.

As the workers are not your employees, you are not stuck with the extensive paperwork, hassle, and legal issues involved in disciplining and firing individuals that are not benefiting your company – simply notify the agency that you do not want them to return. This can also save on costly hiring costs to replace workers, as the agency has a ready pool of employees.

If an individual does an exceptional job, you can usually hire them on as a permanent employee – but only after you are sure that you are hiring the greatest possible asset.

Use a bonus pay system. One of the most innovative payroll cost-reducing strategies I have encountered was a bonus system. In such a program employees were paid minimum wage, but received bonuses for arriving on time and working all scheduled shifts, as well as for meeting quotas or other performance goals.

For example, the base pay could be $6 per hour. If the employee is never more than 15 minutes late and works their full shift all week, they receive a $2 per hour bonus. If they meet a set sales or production goal, they receive an additional $1 per hour bonus.

The cost savings are obvious. If an employee is late, misses a shift, or leaves early, your business pays that person only the base pay. A worker is only an asset to the company if they are there when needed, so there is no sense in paying “full price” for a person who is not there. Any disruption due to employee tardiness or absenteeism is compensated for by savings in labor costs.

If you experience a high turnover rate, you will notice further savings. Employees that leave shortly after training, and have left before providing any real benefit to your business, will not be paid any more than the base hourly rate.

For example, if a new employee spends 2 days in training, and then never returns you would only pay them their base pay for the time worked ($6 per hour in the previous example). If you had instead agreed to pay them a regular wage of $9 per hour, you would have paid as much as $216 for 3 days of work, as opposed to the $144 you would pay if you only had to pay the $6 per hour base.

It is interesting to note that employees of a company that used this system considered their hourly wage to be that of the bonuses and the base pay. Using the above example, I did not meet any employee that would tell you they made $6 per hour; they would gleefully tell you they were paid $9 per hour!

Use Piece-Rate or Commission Pay. This is most often used with employees in sales, paying a commission on revenues generated by that employee’s efforts. However, it can also be effectively used in manufacturing and production-based jobs as well.

Quite simply, the employee is paid based on how much they produce for the business. In other words, they are paid a specific percentage of the revenue generated by their work, rather than the time they spent at your company. Labor costs are thus directly tied to the effectiveness of the employee.

Employees benefit as they are rewarded for being productive, and employers benefit by being able to set specific expense goals and maintaining them.

Avoid overtime. At all costs, do what is necessary to avoid paying overtime, either by hiring additional workers (possibly temporary workers during busy seasons) or adjusting workloads, if possible.

Delivery Costs

Negotiate with shippers. Get quotes from several carriers, and ask if they have a reduced rate for frequent shippers. Most, if not all, delivery services have discounts that are not advertised.

Consider little costs. Do you have someone drive to the post office or shipping depot to mail products? How much could you save in wages and fuel by getting a meter, or scheduling pickups? What if you shipped only once or twice a week? Ask yourself these and other questions, and regularly look into new ideas.

Recycle packing material. Check with neighboring businesses to see if they have unused shipping materials and if the necessary offer to pay them a small fee for them. And of course, re-use the materials that vendors use to send items to you!

Recycle packing material

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