Labor Costs and a Franchise's Bottom Line

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Controlling labor costs is always a top priority to manage your franchise’s bottom line. Labor is usually the largest portion of a franchise’s total expense, so any changes in wages directly influence business success. No matter what type of franchise you have or are considering, your employees play a vital role in your organization’s success and profitability.

However, many franchise employees are often lower-wage workers, particularly in retail franchises, and as we've seen filling those positions can be challenging. As a result, some franchises have limited their services or hours because they have limited staff available. Others are committing to full services but are paying higher wages to keep their employees. And all businesses are looking for ways to mitigate the increasing average cost of hourly workers.

Controlling labor costs in any franchise requires a deep understanding of your costs and a willingness to do things a bit differently.

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Understanding All of Your Labor Costs

If Point B is the successful management and growth of profit, you can navigate your way there if you know where you are now, Point A.

1. First, you must understand what your current labor costs are. To calculate your Total Payroll Cost, you may have to research your true costs and consider all aspects of having employees. Include benefits, worker’s compensation, payroll services, uniform purchases, and other costs related to having employees.
2. Then, calculate how much of your sales revenue ends up paying your employees. A simple calculation would be: Total Sales Revenue / Total Payroll = Labor Cost (as a percentage of sales).

In the hospitality industry, for example, reasonable labor costs as a percentage of sales range from ~25 – 40%. However, with the increase of minimum wage in many states and cities, the goal is to stay ahead of changes that impact labor expenses. Since we are trying to increase profit, we must either increase revenue or cut expenses. For now, look at ways to cut labor costs as a way of improving your franchise’s performance.

Reducing Your Labor Costs

Even if your labor expense is in line with your industry average, there are ways to reduce your costs, especially as wages increase, without slashing your staff levels or reducing services and hours:

• Examine overtime. Overtime skyrockets labor expense, so it cannot be a standard way of doing business. To reduce its impact, cross-train your staff to fill in for others as needed. Check that processes and technology are efficient so that employees can complete their tasks within normal hours. And use technology to avoid overtime fraud.
• Reduce Turnover. If turnover is high in your franchise, work on the reasons that cause the turnover. Employees might leave due to scheduling issues, lack of upward mobility, or other reasons. Regardless, it means that other employees must fill in (causing more overtime), and you spend more hiring and training someone new.
• Adjust schedules. Maybe greater flexibility will work for employees and help reduce your wage expenses. You know your high-need times and busy days. Split shifts or on-call shifts might help manage expenses. With good software options, flexible changes could work for employees and your bottom line.
• Consider Outsourcing. Benefit costs can run up to 40% over an employee’s wage. In some cases, it might be better to outsource some of your labor expenses. For example, maybe you could outsource bookkeeping or other administrative tasks at a rate that reduces overall expenses.

The economy is on the rebound, and labor expenses are quickly changing, but managing costs will directly add to profit. With a good look at the details of all labor-related expenses, profit will stay consistent or improve. Since labor is the largest and most important expense to manage, understand your labor expense thoroughly and reduce unnecessary costs while building your franchise’s profitability.

Anne Daniells is a co-owner of Enterprising Solutions, a professional services firm specializing in corporate communication and financial improvement for businesses where she shares decades of corporate and entrepreneurial experience—including franchise ownership—in her writings on business culture. She has authored hundreds of articles for publications including AllBusiness.com, TweakYourBiz.com, and MSN.com. Reach out via her website for more on where corporate culture, communication, and human architecture collide.