What is the most common challenge managers face when it comes to calculating labor costs? Accurate work hours estimation, leave and absence management, or anything else?

Labor cost calculation is an essential part of business administration. Irrespective of your business size or sector, you need to calculate your labor costs accurately to estimate your profitability and forecast corporate growth. Accountants and financial managers use different models to calculate workforce management labor costs and get their desired results.

However, the manual calculation is a time-consuming and less efficient process. Besides, the chances of human error are much higher with manual cost estimation which could negatively affect organizational performance. To address this challenge, companies now prefer workforce management software to accurately calculate their labor costs and save their precious time.

In this article, we will explore workforce management labor costs in detail and discuss the best tools for accurate cost estimation.

Let’s get started!

What are Labor Costs?

Labor costs refer to overall expenses that employers have to bear to retain their workforce. It includes wages, incentives, bonuses, overtime, and similar liabilities owed by companies. Besides, some organizations also consider taxes and insurance a part of their labor expenses.

Usually, labor costs are divided into two broad categories. Fixed and variable. Fixed costs are contracted charges or predictable expenses like insurance, pension, provident fund, and healthcare benefits. On the other hand, variable costs are unpredictable and keep changing with market circumstances and product demands. Common examples of variable labor costs are performance bonuses, hourly wages, and sales incentives.

Hence, if you are paying your workforce a monthly or weekly salary, it will be considered a fixed cost. However, businesses paying their workers on an as-needed or hourly basis usually deal with variable labor costs.

Factors Affecting Labor Costs

Labor costs are not equal and vary by industry, organization, role, etc. However, for their own convenience, businesses have identified several commonalities for precise estimation of their labor costs.

For instance, major factors affecting labor costs are social contributions, social security payments, and recruitment spending. From staff hiring and vetting to training and onboarding, all expenses fall under labor costs. Some of these include:

  1. Employee wages (Fixed or variable)
  2. Overtime
  3. Performance bonuses
  4. Insurance and taxes
  5. Staff training
  6. Paid leaves (Sick and casual)
  7. Healthcare facilities
  8. On-site recreation facilities
  9. Pension schemes
  10. Annual events and trips

Importance of Workforce Management Labor Cost

Accurate labor cost calculation is extremely important for business success. You have to make a correct assessment of your labor expenses to calculate your profits and make strategic plans. Once you get accurate numbers about your labor costs and operational expenses, you get a clear picture of where your organization stands. Eventually, you can visualize your desired objectives and shape the direction of your enterprise accordingly.

It is, therefore, essential for business owners to ensure accuracy in their labor cost calculations. Without correct estimations, they won’t be able to identify potential challenges or outperform their competitors.

How to Calculate Labor Costs

Calculating labor costs is not a difficult task. However, make sure you have the correct data and there are no discrepancies in financial calculations. Moreover, companies delegate such tasks to qualified accountants with financial backgrounds.

For basic calculations, you can use the following formula to estimate the labor cost at your organization:

Labor Cost: (Total Sales/Leads x Labor Percentage)/ Average Wages per Hour

In order to calculate the average wage per hour, calculate the gross pay by using the below formula:

Gross Pay = Hourly Rate x Annual Working Hours

Similarly, add absenteeism and other external costs like employee benefits and expenditures to your calculation. Finally, use this formula to calculate hourly labor costs:

Hourly Labor Cost: Yearly Payroll Expenses / Annual Working Hours

Automating Labor Cost Calculation

The manual process always takes more time as compared to automated systems. While calculating labor costs manually, the possibility of human error is always higher. Besides, you will have to work hard calculating employees’ data, estimating their working hours, and making final calculations.

On the other hand, workforce management software can automate labor cost calculation and help your make accurate estimations quickly and efficiently. A fully-automated WFM software has built-in features to record employees’ clock-ins and clock-outs and calculate working hours accurately. Besides, these cloud-based solutions also make accurate labor cost estimations based on inputs like hourly rate, etc.

This way, you can calculate workforce management labor costs in minutes and download detailed reports with just a few clicks.

Benefits of Workforce Management Software

Given below are a few reasons why businesses must use workforce management software to calculate labor costs:

1. Fast & Efficient Method

Calculating labor costs via workforce management software is a fast and efficient method. You can save your precious time by replacing traditional time-consuming practices with fully-automated systems. Instead of managing paper records and calculating expenses manually, you can get your desired results in minutes.

2. Accurate Results

Another benefit of workforce management software is that the chances of human error are considerably lower with these cloud-based solutions. Automation reduces dependency on humans and significantly improves accuracy in financial calculations.

3. Data Security

Managing pen and paper records is very difficult. You cannot rely on traditional data management practices while growing your business. Workforce management software is built considering the data management needs of modern businesses. You can save your confidential data and secure previous records by automating labor cost calculations with workforce management solutions.

Final Words

Nothing is more important for an entrepreneur than transparency in financial calculations. Accurate estimations lead to correct forecasts and give employees a clear direction for their goals.

Labor cost calculation is extremely important for the correct assessment of organizational growth and progress. However, the manual cost-calculation process is very time-consuming and does not offer the required results.

Hence, companies should use workforce management software like Smart Workforce to address these challenges and calculate labor costs faster and more accurately. This fully-automated WFM solution allows project managers to calculate labor costs accurately and download detailed reports with just a few clicks.

Try Smart Workforce for free today!