There are a multitude of metrics that business owners/operators can use to evaluate the health of their business, but which are relevant to you? The metrics used frequently in manufacturing, for example, might not be relevant to a doctor’s office.
In this blog series, I will explore some common metrics to determine how the metric should be calculated, the benefit of monitoring the particular metric, and when the metric is most useful.
The first metric I will review is Labor vs. Sales, or Labor as a Percentage of Sales. The simple calculation for this metric is Labor Wages / Sales. It’s important, however, to include the true labor cost in the calculation. This would be wages plus payroll taxes and benefits. Therefore, the calculation should be Labor (wages + payroll taxes + benefits) / Sales.
The big question with this metric is, “When is it relevant?” Let’s say I’m a midsize retailer and I have 150 employees working today. Their combined wages for the day are $18,000, but we had a slow day and only sold $25,000 worth of merchandise. The simplified labor as a percentage of sales rate for the day would be 72%. Is that something to be concerned about? If you have very many days like that, absolutely, this retailer should be concerned. Once you take into account the cost of goods sold, additional payroll expenses such as taxes and healthcare, plus building overhead, the retailer probably lost money on this particular day.
Let’s look at another example, though. Let’s imagine I’m a manufacturer who has the same 150 employees working today, with combined wages of $18,000. On this particular day, we don’t have any actual sales, but we are working on building a product that will sell next week for $500,000. Is my 100% payroll as a percentage of sales for the day relevant? Not really.
For many businesses, labor is one of the most sizable expenses. How to analyze that labor, however, varies greatly from industry to industry. Taking the earlier example, retailers can often benefit from monitoring their labor costs directly against sales, but manufacturers might be better served to look at labor productivity (how well are those labor hours being utilized). I’ll review labor productivity as the next common metric.