How To Understand the True Costs of Labor and Plug Your Profit Leaks

You may be making this mistake right now. 

I see it all the time. 

Tons of service business owners think they’ve got a handle on their overhead numbers and are bidding on jobs appropriately, but more often than not, those business owners aren’t taking into account the true costs of labor, and that leads to them breaking even on a job, or worse, losing money each time.

No one gets into business to lose money every time they send out a team to do a job, but when you don’t factor in all the costs associated with the job that is often what happens. 

This is why it’s so important for service business owners to look at all their numbers and have a firm grasp of their true overhead costs. 

Without understanding the true costs of business, you’re going to find yourself stressed out all the time as you try to make payroll each month, with little to no profit left over, even though it feels like you’re always busy.

You end up just staying ahead of the curve by constantly chasing the next job to pay for the last job, which is not a fun place to be.

It’s a bit of work on the front end to get these numbers established, but once you do you can price out your bids much more accurately and start generating a profit margin that makes growing your business much easier.

So let’s talk about understanding the true cost of labor.

I was with Chris, a client recently who owns an electrical company who wasn’t sure where to start. So we started by gathering together all of his payroll data such as employer share of taxes, workman’s compensation insurance, unemployment insurance, etc. We also took a look at how much time each employee receives for vacations and sick time and other benefits like health insurance and bonuses.

Once we had that info, we calculated the average amount of unproductive time for each employee. Turns out Chris’ employees were spending quite a bit of time around the watercooler each day, which was really costing him when totaled up for the year. He also discovered that errors being made with what materials were ordered were also costing him anywhere from 10-15 hours of lost time each week.

Chris calculated the monthly cost of unproductive hours ranged between $2,000 and $3,000/month or about $24,000 – $36,000/year. 

The unproductive costs were entered into the Labor Burden Calculator software in addition to the actual payroll amounts, the employer share of payroll taxes, and other employee benefits.

Calculate Monthly Expenses

We also spoke with Chris’ bookkeeper and got all the info to get a complete picture of his overhead costs, including the cost of his office staff and loan payments. 

As soon as we ran the numbers, right away he realized that his fully burdened labor was quite a bit higher than he had originally thought which meant he hadn’t been charging enough for labor on his bids. 

Now the missing profit in Chris’ business was starting to make sense. Since he didn’t factor in all his costs, a fair amount of the time Chris did a job he was actually losing money!

After a couple of months of better job bids, Chris began to feel the increased profits in his business. 

It was beginning to get easier to make payroll, which helped decrease some of the stress he had been carrying. 

He now realizes the importance of keeping a close eye on his ongoing labor costs as part of protecting the bottom line profits.

Now he is excited to discover the next profit leak in his business.

Members of our group coaching program, “Path To Increased Profitability” get access to a free Labor Burden Calculator program for their business. We encourage our members to run the numbers semi-annually so they can stay on top of these numbers and maximize profits.

We’ve seen members identify savings in this area of anywhere from $20,000/year to $150,000/year, depending on the size of their team. That’s not chump change!

Click here to contact me to find out how you can become a member and start saving now!

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Do You Have A Plan To Increase The Profits In Your Service Business?

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