When people think about the benefits of using a staffing agency, they might think the only benefit is that a staffing agency will simply save you some time filling your job openings. While it is true, they will save you time, their impact reaches much further and deeper. Exploring how a staffing agency can make your company financially more effective and efficient, and taking advantage of that benefit, should be the next step your business takes to improving production and financial health.
One of the biggest questions business owners and managers must ask themselves; How do I create an efficient workplace? Keeping your workers productive and your finances accurate is easier said than done, or is it? One thing that employers seem to miss when thinking about ways to increase their productivity is labor costs, and how they are paying their workers. We are going to explore the impact of variable labor costs and the advantages that come with using them.
Variable Business Costs vs. Fixed Business Costs
To understand how variable labor costs can improve your business and why they may be the best option, one must first understand the difference between variable and fixed labor costs.
Fixed costs are costs that do not vary based on the production of the business. If a business over-produces, these costs stay the same. If a business under-produces, these costs are still incurred by the business. An easy example of this would be an office rental space. If you lease office space for $1,000 per month, that $1,000 will be a cost incurred every month.
In contrast, variable costs vary depending on the company’s production. If it costs a restaurant $3 to make a burger and they produce 1,000 burgers in a day, their variable costs incurred from burgers for that day are $3,000. However if they only produce 500 burgers that day, they only incur $1,500 in burger costs.
Variable Labor Costs vs. Fixed Labor Costs
These same basic principles come into play with fixed and variable labor costs. When thinking of fixed labor costs, think of salaries. When you are paying an employee a salary, that cost is going to be incurred regardless if the employee is meeting production needs or not. Making that payment is contractually required over the course of the year. Variable labor costs are the exact opposite, in that they vary based on the employee’s production. A common example of these types of labor costs are commissions for salespeople. If a salesperson earns 5% of their yearly sales as their compensation, that cost to the business will go up or down depending on how much they sell. Using temporary employees is another example of variable labor costs. You have a fixed commitment cost for the time they are with your company, but this is not a long-term, recurring fixed cost. Additionally, there are no additional employee-related expenses such as benefits.
Impact of Variable Labor Costs on Employee Productivity
So why is it so important to consider variable labor costs over fixed labor costs? As mentioned above, it can all be simplified by one word: productivity. Why does anyone who works have a job? Money, right? People are motivated by money, especially in the workplace. If someone’s labor is a fixed cost, their production is most likely only going to be so high. This doesn’t mean they are a lazy worker, this is just human nature. This mentality is like the famous saying ‘What you put in is what you get out’ only backward; ‘What you get out is what you put in’. If someone knows they are making $50,000 per year or even $15 per hour, it’s going to be hard keeping them motivated to produce more than their ‘worth’ or ‘cost’ to the company. After all, they aren’t benefiting if the company over-achieves from their hard work.
On the other side of the spectrum, productivity with variable labor costs is likely to increase. If your employee’s pay depends on how many sales they make, how much they produce or how many hours of overtime they work, they are going to be more motivated. Would you want to sit at work if you weren’t getting paid to be there? Probably not, you would probably start making sales, picking up extra shifts and making the most out of your hours in order to reach your personal financial goals.
How Staffing Agencies Improve Efficiency
Over the course of the year, staffing agencies will place over 15 million temporary employees in the United States. By putting temps into these roles, staffing agencies help avoid overstaffing issues that lead to inefficient production levels.
Think of it this way, if you hire someone permanently to work for you because the workload has increased, you are incurring a fixed labor cost. If in a few months, or by the end of the quarter, you realize you no longer need that help and the workload has diminished, you are now stuck spending unnecessary money on unneeded labor and are now being inefficient with expenses. Rather, if you had hired a temp worker to a short-term contract, you added a variable labor cost. Once the workload has decreased and the contract is up, that variable cost is now gone, and the business continues to use its funds sufficiently.
Why It Matters
Direct labor is the work required for a certain amount of production. From the viewpoint of the business, the costs needed to reach that production level can be translated directly into a variable labor cost, or a direct labor cost. By treating these costs in this way, you get a better grip on the value of your dollars. Knowing exactly how much cash is required for your business to reach production at certain levels, helps accounting and management/ownership in their decision-making process. This can transfer into the decision to hire a temp employee (variable labor) or a permanent employee (fixed cost). Overall, understanding the cash to production ratio helps the financial efficiency of the business as a whole.
