Staff Cost Ratio Formula – Knowing the actual figure your company spends on staffing can be misleading. Most employers rely on it when considering the sustainability of their business.
But the headline figure for labour only tells part of the story. Granted, it is an incredibly useful part of the story, especially when looking at your bank balance. But it is only part of the story, nonetheless. A better indicator of the overall health of your business is the staff ratio formula (or labour ratio formula).
What is the staff cost ratio formula?
The staff cost ratio formula is a way of presenting the cost of labour in a business as a percentage of revenue. To work out the staff cost ratio, you use the following formula:
(Total cost of labour over the period ÷ Gross revenue generated over the period) x 100
For example, if you generated £100,000 in revenue over the year and your staffing costs were £33,000, the formula would look like this:
(33,000 ÷ 100,000) x 100
Which would equal 33%. In other words, the labour costs over the period accounted for 33% of the revenue generated.
Why is the staff cost ratio formula better than using the headline cost of staffing?
The staff cost ratio formula is often a better figure to use when looking at the effectiveness of your business model. And it can help you understand the sustainability of your company. This is because it shows the relationship between labour costs and your overall sales revenue as a percentage. If the percentage is too high, then you may be running a business with unsustainable levels of staffing. If it is low, then there is room for you to increase staffing to grow your business.
In businesses where work is project-based (e.g., construction) the labour cost ratio is a great way to see how much of the revenue generated is spent on staffing. This can make it easier to price a job or, if a client has a fixed budget, see if it is worth taking in the first place.
Why this labour cost percentage matters?
The percentage you generate from the staff cost ratio formula is incredibly important to a business. Here are some reasons why:
- It helps them to understand if they are spending too much on staffing.
- It gives them an indication of how much of their income is going on labour.
- It allows them to forecast future staffing levels based on revenue. It can also allow them to see how sustainable current staffing levels are.
Fixed costs vs variable costs
Labour and staffing are variable costs. They are dictated by the needs of the business and the work available. This makes it difficult to monitor and keep in check. Most other costs in business are fixed. Things like property rental and utilities have a specific figure given to them. This makes it easier to understand and budget for.
The variable nature of staffing makes it even more important to use the staff cost ratio formula. If you don’t, then you may find out one day that your business is unsustainable.
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