Staffing Costs in a Nutshell: What Goes Into Determining a Wage + Tips on Reducing Labor Expenses

Staffing Costs in a Nutshell: What Goes Into Determining a Wage + Tips on Reducing Labor Expenses
Article by DesignRush DesignRush
Last Updated: November 11, 2022

Companies may need up to six months to make up the money they spend on a new hire. 

Labor is the largest expense for any business, accounting for 70% of total business costs. However, this doesn’t mean you should just blindly accept this fact and throw money around. 

Understanding how staffing costs work is a must if you’re to run a profitable business. 

Knowing how to reduce staffing costs is optional, but strongly encouraged. 

Today, we’re going to cover both! 

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What Are Staffing Costs? 

Staffing costs are one of the most important, and often most misunderstood, expenses in any business. 

These are the wages you pay your employees. But there's a little more to it than that. 

In addition to wages, staffing costs include things like payroll taxes, benefits, and training. 

All of these factors can add up quickly, making it crucial to carefully consider your staffing needs before making any decisions. 

With some planning, you can keep your staffing costs under control and ensure your business has the resources it needs to succeed. That’s why having human resources mission statements in place is paramount. 

Before you jump the gun and make a new hire, follow these steps to help you pinpoint the exact staffing costs: 

Step #1: Determine the Number of Employees You Need

This depends on a number of factors, including the size and the nature of your business.

For instance, if you are running a small business, you may only need a few employees. However, for a large business, you may need dozens or even hundreds of employees.

Step #2: Know Who You’re Hiring

Knowing your staff is crucial in pinpointing their salary.

This includes understanding their roles within the company, their skillsets, and their experience levels. 

Step #3: Understand Your Budget

Before you offer raises or bring new people to the team, you have to set a clear budget for staff salaries and benefits. This will save you a lot of headaches down the road. 

It is important to be realistic when setting your budget so that you don’t overspend and put your business at financial risk.

Step #4: Calculate Salary Costs

To do this, consider the number of hours each staff member works and their hourly rate of pay. 

You will also need to factor in any overtime or holiday pay that may be applicable. Once you have calculated the salary costs, you can include any additional benefits such as health insurance or retirement plans.

For example, if you are paying an employee $50,000 per year, and they are entitled to health insurance and a 401k plan, your total salary costs for that employee will be higher than just their base salary.

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Step #5: Consider Other Costs

In addition to salary costs, there are other costs associated with staffing a business. 

These include things like:

  • Training costs. Depending on the nature of your business, you may need to provide training for your employees on a regular basis. Training costs can vary widely, so get an estimate from a training provider before making any assumptions. Before you make any decisions, note that it costs around $1,111 to train a current employee and  $1,268 to train a new employee. 
  • Recruitment costs. If you are hiring new employees, you need to pay for things like advertising, background checks, and interviews. These costs vary depending on the method you use to recruit new employees. For example, if you use a placement or staffing agency to recruit new employees, your recruitment costs will be higher than if you were to post a job ad online and screen applicants yourself.
  • Miscellaneous costs. These could include uniforms, equipment, and office supplies. While these costs may seem small, they can add up quickly when you are calculating staffing costs for a large business. Factor these into your calculations so that you have a complete picture of the costs associated with your staff.

Step #6: Compare Costs Against Revenue

Once you have calculated all of the staffing costs for your business, compare these against your revenue. 

This helps determine if the staffing levels are sustainable in the long term. 

If the costs are too high in relation to revenue, you may need to make some changes to either reduce costs or increase revenue. 

If you don’t feel competent enough to hire yourself or don’t have an HR department, consider opting for human resources BPO services, i.e., HR outsourcing. 

More and more businesses nowadays rely on HR outsourcing; back in 2020, the industry was worth $32.8 billion and it’s projected to reach $45.8 billion by 2027. 

How To Reduce Staffing Costs 

Staffing costs can be a huge burden on any business. 

But there are ways to reduce these costs without sacrificing quality or service. 

From outsourcing non-essential functions to reviewing your staffing needs regularly, here are a few tips that can help reduce staffing costs without compromising the business:

  • Hire interns or recent graduates for entry-level positions. What they lack in experience, they make up for in enthusiasm. Since they usually seek to gain experience in their field, interns and recent graduates are often willing to work for free or a very low salary.
  • Consider using independent contractors instead of full-time employees for tasks that don't require consistent work or the use of company resources. For example, you can hire part-time employees or freelancers and pay for extra help when you need it. New employees usually take about 12 months to perform as expected, so hiring contractors is a good alternative. Part-time employees work fewer hours than full-time employees and, as a result, they are usually paid less per hour. On the other hand, freelance contractors usually work on a per-project basis, so if you’re faced with a challenging project, you can hire a freelancer and skip other costs associated with full-time workers. 
  • Stay organized and regularly review employee performance. Think whether certain roles within the company can be restructured or even eliminated if they are not providing enough value to justify their cost. 
  • Encourage a positive work environment. If employees feel motivated and satisfied, it leads to lower turnover rates and less money spent on recruitment and training new staff members.
  • Rely on technology and automate certain processes where possible, reducing the need for extra manpower. You can choose different software or online tools to automate repetitive tasks.  Automation is the future as it not only lowers labor costs but also improves efficiency and accuracy.  Even more so, 63% of hiring managers and talent acquisition specialists say AI and automation have positively influenced the recruiting process. 
  • Provide opportunities for staff members to upskill and cross-train.  When tasks are distributed evenly among the team, you won’t even have to hire additional personnel.  
  • Ensure your staff is properly trained so they can handle multiple roles and tasks efficiently. 
  • Negotiate better healthcare packages with insurance providers to lower overall costs on benefits. 
  • Implement a performance-based bonus system to incentivize and reward productive employees rather than giving out annual raises to everyone. 

Top Staffing Agencies to Hire

1. Blue Signal

  • Location: 4545 E Shea Blvd, Suite 250, Phoenix, Arizona 85028, United States
  • Average Hourly Rate: $100/hr
  • Expertise: Staffing, Recruiting, Business Consulting, Market Research.

Blue Signal is a Chicago-based placement firm specializing in staffing and recruitment for the IT, wireless/telecom, lighting, food/agriculture and medical/healthcare industries, to name a few.

They have been in business since 2012 and have worked with over 1500 happy clients to help them find the best candidates for their open positions. Blue Signal's team of recruiters has years of experience in their respective industries and is knowledgeable about the latest trends and technologies.

They work tirelessly to match the right candidate with the right job and pride themselves on their high placement rate. And to top it all off, Blue Signal is seen as a trailblazer in the recruitment game, having been recognized as Arizona’s #2 Executive Search Firm in AZ for three consecutive years and being listed among Forbes’ Best Temporary Staffing Firms.

Staffing Costs: Key Takeaways

Needless to say, staffing costs can greatly vary depending on the score of work, the candidate’s experience and expectations, your budget, and much more. 

If you’re considering bringing new workers on board, evaluate them before welcoming them to your team. 

Sometimes, one good hire is worth 10 inadequate ones. 

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