The Gray Cat Blog

A comprehensive collection of blogs designed to assist small business owners and multiunit operators.

Labor Management

Feb 06, 2023

Labor management is perhaps one of the most fundamental aspects of running a profitable business. Servicing the customer with too few people on staff and sales will be negatively impacted as customers will shop elsewhere. Staff the business with too many people and the profits of the products are quickly lost due to labor expense. The key in managing labor is finding the “sweet spot” where customer service is met with the appropriate amount of labor dollars spent.

Building a labor schedule is no easy task and managing it requires constant oversight. In order to run a business, a minimum baseline needs to be established in order to “keep the business operating”. If you are in the retail business, obviously at least one person needs to be at the store at all times. Beyond the minimum baseline, most companies view labor as a percentage of sales – i.e. if sales increase, labor expense increases proportionally. This type of management allows the business to add to or subtract from the schedule.

The ebb and flow of labor management takes into account all seasonal, geographic and business demands of the business. Prudent managers know how to schedule according to year-over-year results, influences of marketing and what is required to provide excellent customer service. Here are some key items to consider when creating a labor management schedule:

Number of People Required: The first step is to determined how many people are required to be on the staff. Not all of these employees will be working at the same time, so you will have to understand the dynamics of each employee. Each employee may be paid different wages, have more accommodating available work schedules and be trained in different skill sets. The manager is required to mesh all of these attributes together to determine the optimal work schedule for the week.

Labor Dollars Vs. Budget: Once the manager is cognizant of all the employee nuances regarding their schedule, they can then begin to build a budget. The budget may be an annual labor target cost to begin with, but then more finely defined based on seasonality and trends. Once the budget has been established, it will help determine the other key drivers of labor that include wage rates, number of hours used and overtime allotment. Those drivers are the key triggers to managing to your weekly budget target.

Wage Rate – Manager, Assistant And Crew: Setting guidelines for wage rates for all of your positions are critical. Over time, these wage rates will change with cost-of-living adjustments and other changes due to performance. Managing labor has to take into account the skill-set and the corresponding wage rate of each staff member in order to optimize labor costs. Highly productive employees generally garner the highest wages. The tradeoff is that these highly skilled employees can manage their jobs more efficiently which allows the manager to run the store with less. The balancing act of productivity versus wage rate is the key trigger.

Ceiling Hours: The amount of hours that are determined to be used are known as ceiling hours. Setting a labor hours schedule based on anticipated sales volume is the first step in establishing ceiling hours. Every manager should know the corresponding labor hours to be used with the sales volume based on a blended hourly wage. The blended hourly wage rate is determined by combining the amount of hours each wage earner is working. If ceiling hours are exceeded, not only will labor be over budget, but the amount may be exaggerated due to overtime.

Overtime: Run your operation too tightly – without contingencies for incremental business – and you may find that you have to invest more in overtime than anticipated. Generating extra business is a great issue to have, but watching the incremental profits become eroded due to paying for overtime is not. The shrewd operator manages their labor with the right amount of “slack” in the schedule to adjust to customer demands – without having to pay a premium in labor.

Turnover – Manager, Assistant And Crew: Lastly, managing turnover – in particular of highly skilled, cross-trained employees – is paramount for the long-term management of labor. Continual turnover at a business requires that a disproportionate amount of labor is being used to train employees as opposed to labor being used to service customers. Every employee that is lost – especially if they are capable – can negatively impact the ability to manage top-line sales increases.

Labor management is a balancing act that consists of managing labor by its triggers. If you have wage rates under control, yet spend a disproportionate amount of hours on overtime, your wage rate will increase dramatically. Balancing your labor to service the customer requires a continual monitoring and cross-training of your core staff to ensure that productivity matches the investment.

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John Matthews, President & CEO, Gray Cat Enterprises, Inc.

John Matthews is the Founder and President of Gray Cat Enterprises, Inc. a Raleigh, NC-based management consulting company. Gray Cat specializes in strategic project management and consulting for multi-unit operations; interim executive management; and strategic planning. Mr. Matthews has over 30 years of senior-level executive experience in the retail industry, involving three dynamic multi-unit companies. Mr. Matthews experience includes President of Jimmy John's Gourmet Sandwiches; Vice President of Marketing, Merchandising, Corporate Communications, Facilities and Real Estate for Clark Retail Enterprises/White Hen Pantry; and National Marketing Director at Little Caesar's Pizza! Pizza!