We know that we have the Income Statement and the Balance Sheet. We know that we have Accounts Receivables and Accounts Payables. We know that we have Net Income and potentially Net Loss. But did you know that you have Direct and Indirect Labor?
Did you know that there are different types of labor within your business? There are so many different ways to describe the two different types of labor; in fact you could spend hours on Google trying to figure it all out. In the end it all comes down to Direct – Revenue Generating (billable) and Indirect – Non-Revenue Generating (non-billable).
Direct employees are the employees that actually perform the revenue producing functions, i.e. service, installation, deliver, route, roofers, lawn mowers, IT programmers – anyone who performs billable time.
Indirect employees are the employees that work for your company that are not a revenue producer, i.e. salesperson, office manager, service manager, service coordinator, scheduler – anyone who performs non-billable time.
Did you know that labor should be profitable?
Then the next question is – how do we make them profitable?
Retail Labor Rates
Direct employees should be creating enough revenue to pay for themselves – every hour of every day worked. Notice the word “should”! When working with our clients we hear quite often that service departments have to be carried by other departments within the business – they are more of a drain than a revenue producer – a necessary evil that businesses have to have to support their customers.
Why do you think this is? What causes this? It’s not that the employees aren’t working hard enough. It’s not that the employees don’t care. It’s not that the employees aren’t doing their jobs.
We have found that it doesn’t have anything to do with the employee themselves! It has everything to do with how their retail labor rate is being set!
Their retail labor rates are being set, by someone within the business spending hours upon hours using a spreadsheet or maybe even guessing. We see it all the time. My favorite one is – setting their retail labor rate off of what their competitor down the road is charging.
There is a better way!
Proper Retail Labor Rates
We know from years of experience both yours and ours that setting retail labor rates for your direct employees based off of incorrect numbers or guessing isn’t going to give you the growth and profitability required to grow your business. It’s a simple fact of business.
This is a perfect time to refer back to one of my favorite sayings that I have used throughout all of Management Accounting blog series blogs – “Know Your Numbers”. When you know your numbers you are then able to base your retail labor rates appropriately for the amount of profit you require for your labor.
Most service oriented businesses make the majority of their profits from their parts and equipment. Even though they may not be charging properly for their labor they still will be making a profit. But can you imagine what a business could be making and how they could grow if they were charging properly for their labor? Making their labor profitable!
Retail labor rates should be based off the burdened labor cost for direct labor employees. Burdened labor cost provides you with a base number that covers the cost for that employee and a percentage of overhead and indirect employees; work with this number, use this number, create a profitable retail labor rate from this number. It is your number!
Applied Management Group has created the Apex eSuite Burdened Labor Costing SaaS www.apexesuite.com providing you with a way to enter each individual direct labor employee in the program it then provides you with a report giving you their Burdened Labor Cost. The Apex eSuite has been created much like Turbo Tax – you enter your numbers and receive a report for each direct employee entered providing you with their burdened labor cost.
Applied Management Group takes that one step further by providing you with the mentoring and training you may require for the proper use the information you receive from the Apex eSuite. Applied Management Group is here for you.
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