Cutting Labor to Make Revenue Does Not Make Cents!

We all know that labor costs should be somewhere in the range of 23% of overall revenue – but why is it when revenue lacks, we try to make revenue off the labor by reducing the cost even more? Let me explain that again – when revenues go down, it is common that managers react by cutting staff hours. Well, that makes sense – no business, no staff – but what doesn’t make cents, is that when you happen to have “some” business, staff hours are still cut causing you the risk of losing that same business to lack of service. As a consumer, how many times do you stand in line waiting to be served and see that there are not enough employees? Consumers say, “Oh – you must be short staffed” as if there’s a not enough people to hire. In reality, managers have the labor, but don’t schedule in effort to save in labor costs reducing the 23% down to 15%. Now, why would manager’s compromise service in effort to achieve revenue? Usually, because it’s easier than finding new ways to make money. Is cutting labor dollars a viable way to make money? No. When it comes down to numbers, yes, you do see an increase in money – but using the method of reducing labor truly hurts you down the road. You might as well stop furnishing bathrooms with toilet paper – that too, will raise your income potential. When any business is in need of more revenue – then it’s important to raise your sales efforts and get your creative juices going to create a new service, feature or product to generate new revenue. The lack of labor hinders business growth, raises customer complaints and generally contributes to tense workplace environments when the workload in itself is not diminished. Staff should not be doubling or tripling the output of work in effort for management to achieve bottom line goals. Are there other costs saving ideas to help that won’t cut into labor? Yes – try these ideas if you haven’t already:

Administration – ask customer if they need a receipt – reams of paper average $6 - $10 per ream depending on page weight. The average business goes through 7 reams a day. Where else can you apply paper product savings?

Payroll – how many salaried and hourly employees do you have scheduled? A lot of businesses are unbalanced in these areas – too many hourly or too many salaried. You want to watch out for labor glitches – overtime and burn out. With hourly staff members, the overtime may still save more money than a salaried person depending on compensation. However, overtime adds up quickly and certain laws will dictate a person’s position to acquire not just time and half, but double time if the hours are too many. This may cause you to want to put your salaried employee to work more labor hours – replacing the hourly employee. However, don’t overwork your salaried employee – it will lead to burn out and if they’re doing more of the labor – then you have to ask yourself if a salaried position is needed and what is your salaried person not achieving if they’re working the job of an hourly employee?

Inventory Control – are there procedures in place that maintain par levels and security of products to prevent them from walking out the door? These are procedures that must be adhered to monthly and turned into your controller or GM who can monetize your losses. Inventory is a cost to any business and if people help themselves frequently to such items, then you might as well put them on display and label them “samples”. Your inventory adds up to hundreds of dollars monthly – so watch it if you’re not.

Value versus Quantity – are you getting the best bang for your buck? My hotel restaurant had a 57% food cost – but after revamping and changing out various products and replacing vendors; my executive chef and I helped lower our food costs down to 33% and improved the quality of our food. Now there’s an achievement! Vendors are begging for your business – try changing out a few.

These and other ideas will have a tremendous impact on your bottom line. The thing is, once the change and savings have been achieved, you will reach a lull if you don’t find new revenue or build up your sales and then you will not achieve your overall goals. So – stay focused, don’t chince on labor, just be realistic or your customers will walk away…and that’s a big loss of business that you can’t afford. Speaking of sales, join me next week as I discuss the importance of driving your Sales Team and ideas to ensure Sales gets a "sale"! Hope your week is a productive one!