Have you started to eat lunch or have a snack during a busy day when you get interrupted?
Have you ever taken a couple of bites from of an apple and have to put it down to take care of something?
The problem is when you come back, your apple has started to turn brown and just doesn`t look as appetizing as it did.
The same thing can happen to your labour margin. If you “put it down” or don`t pay attention, you`ll find your labour margin going bad and just doesn`t look as good on your bottom line.
A complete understanding of what affects your labour margin – and how to hold 60% margin fully loaded with benefits - is essential to maintaining a profitable business.
One of the major contributors to a declining labour margin is your payroll when compared to your labour rate. Labour is a commodity that you buy and sell, much like your product inventory.
The major difference is that, like the apple, labour margins go bad constantly. Labour is perishable; you purchase it for a short period of time and when the time is up, you have to re-buy it. One of the problems is like our big juicy apple, top staff don't "grow on trees," so when that talented person comes along, we have a hard time not bringing them on board.
The only problem is that the big juicy apple comes with a big juicy price - and rightfully so, given their skills and talent. But do we need them and can our labour rate support them and still give the business the profit that it needs to make?
Many owners need some help keeping things in line - a good accountant who understands the business sector or some type of professional coaching, for example. It helps prevent the tunnel vision that occurs when running a busy business.
Analysing the Situation
We need to look at our labour rate and see whether it has the ability to support the staff that we have and still give the business the return it needs. A Labour Rate Analysis is a simple way to check on your more expensive employees and see whether your labour rate can support them.
Take your most expensive staff member’s flat rate (or their hourly pay, if that is your pay system], then add to their pay for that one hour the additional costs involved in having the person there.
You have to keep in mind that they cost you more, sometimes much more, than just their basic pay. ake into consideration payroll tax, superannuation, work cover, unemployment insurance, any health insurance, vacation time, sick pay, uniforms, etc.
Take all these factors and add them to the hourly rate for the one hour. This gives you the actual cost involved for that big juicy apple.
Now, remembering that this labour is something we buy so we must sell it to make a profit, we take the total that we have come up with and multiply it by 2.5 to give us a 60 percent margin on that person's labour.
The number that you come up with should be at or lower than your current labour rate. If not, then you either need to raise your labour rate or you may not be able to afford that apple.
Shopping the competition will let us know whether we are charging a competitive price for our labour. If we are lower than those around us, we can raise our rate and that may help, but if we have a labour rate at or above the competition and the magic number that we found at the end of the exercise is higher than our current labour rate, guess what: You can't afford the big, juicy apple that you have!
Remember, we divided the expenses by the amount of time the person is standing on the floor. So if they are billing out less hours than they are on the floor, this will increase your actual cost per hour.
The majority of businesses I consult with are making a 60 percent profit on the first hour, but by the time they calculate their profits on the 40th hour, they are making only a 15 percent profit margin. This is where most owners are getting hurt.
Many of our clients have a labour rate that is higher than the competition and their business is thriving. The reason for this is their clients are willing to pay more because they trust them completely and like the experience of visiting their establishment.
Be careful attempting this strategy, however, unless you have done an extensive customer satisfaction survey and satisfied yourself of your customer approval rate.
Selling the right mix of products and labour will help. Making sure that you have your maintenance items priced properly and giving good margins.
Another guideline is to watch your team and make sure you have the right staff for the job. The expensive "A" technician is offset by your lower-level technicians who make less but are able to perform maintenance items.
Keeping your less expensive technicians productive will help your labour margin, plus you are building for the future. Having the right mix of high to lower skill-level technicians is a huge key to maintaining the 60 percent profit on labour.
How do we know if we have the right mix? Too many times, owners/managers just go with what they think "feels" right. Instead of guessing, try this exercise: Take all the invoices for a certain time period - the longer, the better. Break them down into piles based on what level of skill was needed to perform the task that that task.
Then count up the number of labour hours on the invoices for each function. This will give you a good guide on what type of staffing you need, compared to what you have.
Remember that the big juicy apple looks good, but once the day has started and you’ve just taken a big bite. Make sure the last bite of the day tastes as good as the first.
For further information on how your business can benefit from these and other exciting business and marketing tactics call Bob Lyon direct on 043 883 0937 or get your FREE report entitled “How To Sell Your Business At Your Price … And Cause A Stampede Of Prospective Buyers Literally Begging For Your Time” by simply going to www.betterbusinessreport.com/ab4s1.htm