Have you wondered if your business has too many or too few employees working? You might want to consider calculating your labor-to-sales ratio. This number is a commonly used performance measure by businesses to track their labor costs and its impact on operations. The labor-to-sales ratio shows the total labor costs for each $1 in sales.
It is calculated by dividing all personnel costs over a time period by sales over the same period. Personnel costs include salaries, wages, payroll taxes, unemployment insurance, and any other payroll costs.
January Labor to Sales Ratio = January Personnel Cost
January Sales
By determining the level of labor necessary to attain a certain profit level, you can then monitor the labor to sales ratio on a regular (daily, weekly, or monthly) basis to see if you need to make any adjustments to your staffing to reach target margins.
If your business is seasonal, you will want to compare the same months over time. For example, if you run an agritourism business, you would want to compare your October to another October because comparing it to another month is probably not going to give you good information.
You want to see this number going down, which indicates that the business is using labor to generate more in sales. If the number increases greatly, you want to take a look at your payroll and figure out why.
Finally, the labor-to-sales ratio can be used to compare your business’ performance to peer businesses. Labor-to-sales ratio is a commonly used measure, and you can often find benchmark ratios for your type of business.
For assistance in determining your labor-to-sales ratio and analyzing what it means for your business, give us a call at 859-550-3972 or emails us at kcard@kcard.info.