Financial Planning for Businesses Facing Labor Shortages
If it feels like it’s more difficult to keep your team fully staffed than it used to, you’re not imagining things, and you’re certainly not alone.
Businesses across numerous and varied industries are contending with a labor market where qualified candidates are scarce, turnover is expensive and existing employees are increasingly willing to walk if a better offer comes along. The result is a familiar and uncomfortable pattern: Wages creep up to attract talent, overtime piles up and the budget you built at the start of the year no longer reflects reality.
Labor shortages aren’t just an HR problem; they’re a financial planning problem. Treating them as both is often the difference between a business that successfully adapts and one that gets squeezed out.
Here’s how to think about managing labor cost pressure when the hiring environment isn’t accommodating.
Understand What Labor Shortages Are Actually Costing You
Before you can manage rising labor costs, you need to understand where they’re showing up. Many business owners have a general sense that overtime is “up” or that they’re “paying more to hire,” but few have quantified it in a way that’s useful for planning.
Separate labor costs into distinct categories, such as:
- Base wages
- Overtime
- Signing and/or retention bonuses
- Temporary staffing fees
- Contractor fees
And don’t forget less obvious costs such as extended onboarding time, training and lost productivity while positions sit vacant.
When you break the numbers apart this way, it’s common to discover that overtime and temp staffing (and not base-pay increases) are the real budget-busters. That distinction matters, because the financial fix for chronic overtime is very different from the fix for rising market wages.
Dig Into Where Overtime Is Coming From
Overtime is often the fastest-growing and most controllable piece of the labor cost puzzle. It’s worth understanding whether overtime is being driven by genuine demand growth, by open positions that haven’t been filled, by scheduling inefficiencies or by a small group of employees who are consistently picking up extra hours.
Each of those causes points to a different solution. For instance …
- Demand-driven overtime might justify raising prices or investing in additional hires despite a tight market.
- Vacancy-driven overtime might be cheaper to solve with temporary staffing or automation than with a permanent overtime pattern.
- Scheduling-driven overtime is often the easiest and least expensive problem to fix, sometimes requiring nothing more than better shift planning.
Consider the Full Cost Comparison Between Options
Whatever you do, don’t just default to the first fix that comes to mind, whether that’s overtime, a staffing agency or a wage increase. You’ll want to compare the true costs of every viable option.
For instance, you might want to consider the difference between overtime pay versus the fully loaded cost of hiring an additional employee (which includes not just wages, but also benefits, payroll taxes and onboarding). Or you might need to consider temporary/contract labor versus a permanent hire, factoring in agency markups against training and turnover risk.
You may find that the “easiest” fix is also quietly the more expensive one.
Revisit Your Budget and Cash Flow Projections More Frequently
A labor budget built in January often doesn’t survive contact with a tight hiring market by December. If wage pressure and overtime costs are a moving target, your budgeting cadence needs to move faster too.
You’ll want to conduct a full financial review at midyear. And you should review labor costs even more frequently: quarterly at a minimum, though there’s a case to be made for a monthly check-in specifically focused on labor spend versus plan.
These check-ins don’t need to be a large undertaking. It’s a matter of comparing actual wage, overtime and staffing costs to what you projected, and asking whether the variance is temporary or a sign of a structural shift in what it costs to keep your business staffed. Businesses that catch this drift early have more room to adjust pricing, staffing models or financing before the pressure becomes a crisis.
It’s also worth stress-testing your cash flow projections against a scenario where labor costs run higher than expected for an extended period. If a sustained increase in wages and overtime would strain your cash position, that’s valuable information to have well before it happens, not after.
Build Rising Personnel Costs Into Your Pricing Strategy
If rising labor costs are structural rather than temporary (and for many industries, they increasingly are), they must be reflected in how you price your products and/or services. Absorbing higher wage and overtime costs indefinitely without adjusting pricing or margins simply isn’t a sustainable long-term strategy.
This doesn’t necessarily mean you should enact across-the-board price increases. It might instead mean you should revisit margins on your most labor-intensive services or products, build labor cost escalators into longer-term contracts or simply make sure you regularly revisit your model rather than setting it once and forgetting it.
Don’t Overlook Retention as a Cost-Control Strategy
Numerous studies show that it’s far more cost-effective to retain employees than to hire new ones. Just how expensive new hires are varies widely depending on the study, but at anywhere between 50% to 200% more than the cost of retention, your business should view keeping employees as a cost-saving strategy.
This will require you to examine total compensation package (insurance, 401(k) and other benefits), not just base pay. And you’ll want to do the math to determine whether targeted retention bonuses, more flexible scheduling and other improved benefits will cost less over time than the turnover cycle.
Don’t Let Labor Shortages Hold You Back
Business financial planning simply can’t account for static labor costs anymore; you have to assume that number will keep going up. But understanding where your labor dollars are really going, as well as how to plan around a tighter labor market, is easier with the right financial guidance.
McManamon & Co. is an accounting, tax, fraud, forensic and consulting firm that serves small and midsize businesses across a broad range of industries. Our accounting team can help you build labor cost projections into your budgeting and cash flow planning, evaluate the true cost of overtime versus additional hires and develop a pricing strategy that accounts for a tighter labor market.
Call us at 440.892.8900 or contact us online today to learn how we can help you plan around today’s labor market realities.
Tags: accounting, financing, hiring, McManamon, McManamon & Co., record-keeping, small business, small business accounting, small business finances | Posted in McManamon & Co., Small business finances