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Importance of Labor Cost Reduction for Small Businesses Explained | Business Hub |®

Importance of Labor Cost Reduction for Small Businesses Explained

Discover how the profitability of your small business depends on effective labor cost control. Find out why it is so essential to control workforce expenses.


Reducing Labor Costs

The price of labor constitutes a significant part of the total cost of a small business, and no business can survive for long by ignoring labor costs. Downsizing the workforce may result in short-term cost reduction. However, this will leave you vulnerable when you need to ramp up volumes with short notice. Unfavorable employee turnover also contributes to overall labor costs. Rational and intelligent labor cost control will boost productivity and enhance profits.


Direct and Indirect Benefits of Labor Cost Rationalization

By keeping a keen eye on the cost of labor, you can save money in the short and long terms. Although this is the most obvious benefit, you will learn to recognize many other benefits once you begin the process of cost reduction.

Cost control is impossible without data related to labor costs and labor performance. With this data in hand, you both reduce costs and also find ways to improve efficiency, enhance skills, rationalize HR policies and boost employee morale. Collecting data to facilitate an informed labor cost reduction decision is a cost-saving idea in itself.

Invite cost-saving ideas from employees and make them a part of the decision-making process. Be innovative, perhaps by reducing the time allotted for breaks and using the money saved to set up a gym or a recreational zone for your employees. In this way, labor cost reduction can actually help improve employer-employee relations.


Technology: a Fantastic Tool to Rationalize Costs

Cost control can be initiated by automating the process of recording employee attendance. Software applications work to analyze data and determine the hourly efficiency of your workforce. This helps you assess employee discipline and efficiency and helps you plug wastages and leakages.

Is obsolete technology affecting the efficiency of your workforce? Spending money on improved solutions can help you automatically reduce labor costs without having to downsize a single employee.

Technological improvements have helped us overcome past limitations. Consider reducing expenses by asking employees to work from home. Offer flexible working hours and keep track of hours with the help of software applications and web cameras to reduce expenses.

Use social networking websites to minimize the cost of finding new talent. Encourage employees to find new talent through professional networking websites. Consider the option of outsourcing the work to third-party freelancers to maximize cost reduction.


Risks Involved in Labor Cost Reduction

Buying an automated time clock can cost between $350 and $500, which may seem exorbitantly expensive when compared to traditional solutions. Buying laptops and paying for the installation of networking equipment for work-from-home employees also may involve a hefty outlay. However, it is easy to spend and hope that benefits will automatically flow.

Technology, however, will yield benefits only if the collected data is utilized properly. You will also have to consider the recurring cost of maintenance and upkeep.



Labor cost reduction must become a part of the core vision of your small business. Factors affecting labor costs are always changing. Your efforts to reduce expenses must evolve accordingly. On the other hand, a keen business sense is also required, since one cannot just blindly hope that technology alone will reduce expenses.


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