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Managing costs is a crucial aspect of running a successful business, and understanding the relationship between staff costs and revenue is essential for maintaining a healthy bottom line. One of the key performance indicators (KPIs) that can provide valuable insights into the efficiency and profitability of a business is staff costs as a percentage of turnover. This KPI measures the proportion of revenue spent on employee salaries, benefits, and related expenses.
By monitoring this metric, businesses can gain a clear understanding of their labour costs and identify opportunities to optimise staffing levels, streamline processes, and reduce expenses. It allows businesses to identify any excessive staff costs that may be impacting profitability and make informed decisions about their staffing and budgeting.
In this blog post, we will explore the importance of staff costs as a percentage of turnover, and how businesses can leverage this KPI to improve their financial performance. We'll discuss the benefits of tracking this metric and provide practical tips on how to calculate and analyse it effectively. By the end of this post, you'll have a better understanding of how staff costs impact your business's profitability, and how to use this KPI to make informed decisions about your staffing and budgeting strategies.
"Without data, you're just another person with an opinion."
- W. Edwards Deming
It is a financial metric that measures the percentage of total revenue spent on staff costs.
It’s used to evaluate the efficiency of a company's workforce management and to monitor the impact of staffing decisions on the company's profitability.
A lower percentage indicates that the company is effectively managing its labour costs, while a higher percentage may suggest that the company is overstaffed or paying its employees too much.
Hospitality and Retail:
As these industries are labour-intensive, staff costs can be a significant expense. Therefore, it is essential to keep a close eye on this KPI to ensure that the business is profitable.
Manufacturing:
Manufacturers need to ensure that their staff costs are not too high and that they are getting the maximum output from their employees.
Healthcare and Education:
Healthcare providers need to ensure the efficiency of their workforce so that their staff costs are not too high and that they are providing quality care to their patients. Similarly, the education industry needs to ensure they are providing quality education to the students, without spending too much on staff costs.
SaaS:
Since technology companies rely on a talented and skilled workforce to develop, market, and support their products, their staff costs can represent a significant portion of their expenses.
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There are five key benefits to measuring this KPI in your business:
1. It helps in identifying the efficiency of the workforce: Ensuring the business is generating a return, the efficiency of the workforce is vital to manage wastage.
2. It enables better budgeting and forecasting: by tracking this KPI, businesses can better plan and forecast their staffing costs. This helps in creating more accurate budgets and forecasts, which can help in making better business decisions.
3. It helps in identifying cost-saving opportunities: businesses can identify areas where they can reduce their staffing costs. This can help in improving profitability and competitiveness.
4. It enables better performance management: by monitoring the performance of employee efficiency, it helps identify areas where the business and individual employees need to improve. This can help in creating a more productive and efficient workforce.
5. It helps in benchmarking against industry standards: with this KPI, businesses can compare their staffing costs to industry standards. This can help in identifying areas where they are over or under-spending on their employees and adjust accordingly.
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There are several limitations to tracking the KPI of staff costs as a percentage of turnover:
· The staff's quality or their productivity. A company may have a high percentage of staff costs, but if the staff are highly skilled and productive, this may be a good investment for the business, that is not considered in this KPI.
· The industry or sector in which the company operates. Some industries, such as healthcare or education, may require more staff costs due to the work.
· External factors that may affect staff costs, such as changes in minimum wage laws or fluctuations in the labour market.
· The specific areas where staff costs are being incurred, such as salaries, benefits, or training.
· The company's overall financial performance or profitability. A company may have a low percentage of staff costs, but if it is not generating sufficient revenue or profits, this may not be a sustainable strategy.
The formula to calculate the KPI "Staff costs as % of turnover" is:
Where:
- Total staff costs: The sum of all costs related to the salaries, benefits, and other expenses associated with the employees of the company.
- Total turnover: The total revenue generated by the company during a specific period. This includes sales revenue and other income sources such as investments or interest earned on cash reserves.
As this KPI measures the efficiency of the company's workforce and how much it costs to generate revenue, a lower percentage indicates that the company is using its resources more efficiently, while a higher percentage indicates that the company may be spending too much on staff costs.
If a company has a turnover of $1,000,000 and staff costs of $200,000, the staff costs as % of turnover would be 20%.
Staff costs as %of turnover = (Total staff costs / Total turnover) x 100
=(200,000/1,000,000) x 100
= 20%
If you find your staff costs as % of turnover are consistently high, your company may need to consider reducing staff or finding ways to increase productivity. Conversely, if it’s consistently low, the company may be under-staffed and may need to hire more employees to meet demand.
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The benchmark for staff costs as % of turnover can vary depending on the industry and company size. However, a general benchmark for this KPI is between 25-35% of turnover.
If you find that the company is achieving between 25-35%, it is effectively managing its staffing costs and is operating efficiently. If it is consistently higher than this, the businesses workforce is not as efficient as it should be.
When measuring or implementing activities based on this KPI, it is important to understand that there are common errors to consider:
· Inaccurate data: If the data used to calculate staff costs or turnover is incorrect, the resulting KPI will also be inaccurate.
· Inconsistent data: If the data used to calculate staff costs or turnover is inconsistent over time, the resulting KPI will not accurately reflect changes in the business.
· Incomplete data: If data is missing for certain periods or departments, the resulting KPI will not accurately reflect the overall performance of the business.
· Misinterpretation: If the KPI is not properly understood or interpreted, it may be misused or misinterpreted, leading to incorrect conclusions or decisions.
If you find that you are consistently hitting high percentages, here are some actions you can take to reduce them and hit KPI targets:
1. Increase productivity: One way to improve the staff costs as % of turnover KPI is to increase productivity. This can be achieved by providing training and development opportunities to staff, implementing efficient processes and systems, and setting clear performance targets.
2. Reduce staff turnover: High staff turnover can be costly for businesses, as it requires constant recruitment and training of new staff. By implementing strategies to improve employee engagement and retention, such as offering competitive salaries and benefits, providing a positive work environment, and offering opportunities for career growth, businesses can reduce their staff costs.
3. Automate processes: Automating certain processes, such as payroll and HR administration, can help by reducing the need for manual labour and streamlining operations.
4. Outsource non-core functions: Outsourcing non-core functions, such as IT support or accounting, can help reduce staff costs by eliminating the need for in-house staff to perform these tasks.
There are several variations of the KPI "Staff costs per patient", including:
- Direct Staff Costs per Patient: This KPI measures the total cost of staff directly involved in patient care, such as nurses, doctors, and therapists, divided by the number of patients.
- Indirect Staff Costs per Patient: This KPI measures the total cost of staff indirectly involved in patient care, such as administrative staff, support staff, and maintenance staff, divided by the number of patients.
- Total Staff Costs per Patient: This KPI measures the total cost of all staff, both direct and indirect, involved in patient care, divided by the number of patients.
The main difference between these variations is the scope of staff costs included in the calculation. Direct staff costs only include those directly involved in patient care, while indirect staff costs include all staff involved in supporting patient care. Total staff costs include both direct and indirect staff costs. Depending on the organisation's goals and objectives, one variation may be more relevant than the others.
What is the staff costs as % of turnover KPI?
The staff costs as % of turnover KPI is a financial metric that measures the percentage of a company's revenue that is spent on employee salaries, benefits, and other related expenses.
Why is the staff costs as % of turnover KPI important?
The staff costs as % of turnover KPI is important because it helps businesses understand how much they are spending on their workforce relative to their revenue. This can help them identify areas where they may be overspending or where they may need to invest more in their employees.
How is the staff costs as % of turnover KPI calculated?
The staff costs as % of turnover KPI is calculated by dividing the total staff costs by the total revenue and multiplying by 100. The formula is: (Total Staff Costs /Total Turnover) x 100.
What is a good benchmark for the staff costs as % of turnover KPI?
The benchmark forthe staff costs as % of turnover KPI can vary depending on the industry andcompany size. However, a general benchmark is around 25-35% for mostindustries.
How can businesses improve their staff costs as % of turnover KPI?
Businesses can improve their staff costs as % of turnover KPI by implementing cost-saving measures such as reducing overtime, outsourcing non-core functions, and improving productivity. They can also invest in employee training and development to increase their skills and efficiency.
