This is one of the most used KPIs is labour cost with our restaurant clients yet it can be used for any modern business. In my years of experience working with point-of-sale systems, I've seen many retail shops firsthand how proper labour cost management can make or break a small business.
Labour costs
The labour costs encompass all expenses related to your employees. This includes:
- Wages and salaries
- Overtime pay
- Superannuation contributions
- Payroll taxes if applicable
- Employee benefits
- Paid time off (holidays and sick leave)
You probably have this figure in our profit and loss accountant, which the accountant prepared for you for the ATO. So, these calculations should only take you a few minutes to complete.
Revenue-based Labour Cost KPI
The labour cost ratio is a critical metric that measures the proportion of your revenue spent on labour expenses. It's calculated using this formula:
Labour Cost Ratio = (Total labour cost / Total revenue) x 100
If your shop's total labour costs for the year were $100,000. If your revenue is $500,000, then your labour cost ratio would be:
($100,000 yearly labour costs/ $500,000 yearly revenue) x 100 = 20%
So here it means you're spending 20% of your yearly revenue on labour costs.
Time-Based Labour Hour KPI
Although not part of the typical Labour Cost KPI, I suggest calculating it by week.
Labour cost a week = (Total labour cost / Number of weeks) If, for example, using the above, we say it is open 52 weeks a year
Labour cost a week = ($100,000 yearly labour costs/ 52 weeks ) = $1923 a week we need for labour costs in a typical week.
Why the Labour Cost Ratio Matters
Understanding your labour cost ratio is crucial because it:
- It helps you evaluate how efficiently you're using your staff
- Shows the impact of labour costs on your overall profitability
- Allows you to compare your performance with industry benchmarks
Industry Benchmarks
In the retail industry, labour cost ratios typically range from 15% to 20%. However, because all shops are unique, they have different benchmarks. It's essential to research specific benchmarks for a shop similar to yours in your area. Many labour costs by industry are listed here, unfortunately not all, so what people often do is look for some industries that are close to theirs and see what those industries offer.
Tips to Optimise Labour Costs
Based on my experience working with various retailers, here are some effective strategies to manage your labour costs:
Use a Modern POS System
Your point of sale system has plenty of items that can do tasks that use labour, e.g. AI stock ordering management features. Use it to monitor your labour costs:
- It can also do rostering, allowing you to track your employee hours accurately
- Generate reports labour
- Allow you to forecast your staffing needs based on historical sales data
- Identify peak hours and adjust staffing accordingly
- Reduce overstaffing during slow periods
Employee Management
For example teaching your staff multiple skills, you can reduce the need for specialised roles to create a more flexible workforce. If you can reduce the need for someone extra to come to do a task, well that is a saving.
Monitor and Adjust Regularly
Keep a close eye on your labour cost ratio and adjust as needed. If it's creeping up, look for ways to increase efficiency or reduce costs.
Conclusion
Are you ready to take control of your labour costs? Start by calculating your current labour cost ratio and see where you stand. With the right strategies and tools, you can master labour costs and set your shop up for long-term success.
