Managerial Accounting-Small Business Tips For Labor Expense Reduction
Managerial Accounting-Small Business Tips For Labor Expense Reduction
Tough times call for tough measures. It is much easier to say that than to actually do it when you're a small business owner trying to reduce expenses in a tough economy. Objectivity can wrestle with emotions when these same small business owners have to consider a reduction in labor to decrease expenses and improve margin. Everyone hears news about the fortune 500 companies reducing expenses with the reduction of hundreds and even thousands of employees nationwide to improve profitability for their shareholders. But, what of the small business owner with 50 employees or less?
You are meeting with your accountant and for the 6th straight quarter margin continues to decrease and is now below 4%. Some of this is related to the cost of goods because your production is down and buying in large quantities isn't as affordable as it once was. Higher gas prices at the pump are also a major contributor to expenses that has changed since last year. To top it all off, your business is cyclical and you're looking at 3 months of little to no sales. You can't help but wonder if your business will continue to have going concern. As your meeting continues in the conference room, your eyes wander out to the staff that has served you well, some for more than 5 years, just as your CPA says," have you thought of reducing payroll expenses?"
In small businesses where ownership works hand in hand with employees, staff reduction can be a very difficult and emotional decision. The small business owner has a responsibility to all of the employees and of course to the entity, by keeping the company in business and in a good financial position. Here are some ways to balance the emotion and the objectivity while reducing employee expenses.
Tip #1- Reduce hours rather than eliminate positions. Reducing the number of hours the plant will run and reducing administrative staff hours can reduce expenses in many categories. Reducing the number of hours the plant operates can also provide the time needed to maintenance PP&E without additional overtime expenses; which will be helpful when the cycle of production picks back up and all service records are up to date. Reducing the number of hours the business is open can save 10-20% in payroll expenses and most likely eliminates any overtime.
Tip #2-Terminate employees with just cause. If there are employees that can be considered sub-standard workers or have constant interpersonal issues, it may be a good time to cut the cord. During the busy months, you kept employees like this on staff because the production cycle was moving full steam ahead and you didn't have time to train someone new in the plant, yard or office. Now, with there being less work available to keep employees productive, a termination with just cause is both sensible and practical.
Tip #3- Reduce employee benefit expenses. Most people don't realize that the entire benefits package they earn from their employer is sometimes 25-50% greater than their wages. Medical benefits, insurance, retirement plans and incremental raises should all be evaluated on a regular basis, and annually at the least. You could suspend the company match to the retirement plan. The medical and insurance coverage could be reviewed to negotiate a plan less expensive to the company without reducing coverage amounts. Annual incremental wage increases could be postponed or suspended.
Tip #4-Ask for volunteers. Some people may consider taking one for the team. There are many benefits provided by work force agencies, such as grants for school. Also, the disgruntled employee that you haven't been able to terminate for just cause may just step up and make your decision easy. Either way, if you don't put it out on the table you may never know.
Tip #5-Wage reduction. Most people would consider a pay decrease rather than having their position eliminated altogether. The benefits of being gainfully employed, such as having medical coverage and having the possibility of returning to the original level of compensation, does appeal to many people. Also, it may solicit employees to consider looking for new employment opportunities, further reducing labor costs in the near future.
Tip #6-Utilize seniority. When you have exhausted all of your other options and reducing staff is the only choice left, utilizing seniority is an objective way to keep decisions fair for the employees and it is something that they can relate to. However, be mindful that just because someone has worked for you longer, that doesn't mean they are the best choice to keep. Productivity should always be considered, and a long term employee probably earns more in wages than someone with less time in.
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