ARTICLE SUMMARY: Labor costs are a big part of how small businesses control costs and build in profitability. Too much labor costs put a business in jeopardy, and cutting too much makes it hard to provide the products and services your customers are looking for. Outsourcing services that are important, but not part of your ROI generating activities, is one way to save money on your labor expenses.
Here are three examples of areas in your company that might benefit from outsourcing:
- Accounting: Many small business owners aren’t accounting experts and could use some help in this regard. Fortunately, there are individuals and firms who will contract with your business to help you with this part of your business.
- Cleaning: While it’s true, a lot of small business owners act as the chief cook and bottle washer (meaning they assume the role of office cleaner), but before you hire a cleaning staff, you might want to consider the benefits of contracting with a cleaning company to take care of those cleaning chores.
- Security: While security is becoming a bigger concern for a lot of small businesses, using an outside firm to handle security could save your business some money.
Outsourcing services not only saves your business in human resource costs, it enables you to leverage the experience and expertise of those who are experts at these disciplines. In addition to those mentioned in this article, there are many small businesses that also outsource marketing, phone sales, and other services. Keep reading to learn more.
Payroll costs are frequently the most expensive part of running a small business. On average, a well-managed business can spend 15 to 30 percent of gross revenue on payroll and stay on budget. This rule of thumb varies by industry. Highly-automated industries such as semiconductor plants may have labor costs as low as 10 percent of payroll, while retail businesses may range from 10 to 20 percent, and service industries such as restaurants may average 30 percent. Unfortunately, many companies are paying far more for labor than their revenue levels can sustain. Average corporate labor costs have hovered around 60 percent since the late 1960s, reaching a peak of 64 percent in the early 1970s and dropping to a low of 59 percent during the Great Recession. These numbers help explain why half of small businesses fail within their first five years.
Fortunately, companies that succeed at staying in business have developed some effective strategies for keeping labor costs under budget. One of these strategies is outsourcing. Here are three examples of how outsourcing can help save your small business big bucks.
Accounting is one essential business function that represents a good candidate for outsourcing. Small business owners who handle their own accounting find it one of the most tedious parts of running a business. Four in ten small business owners rank bookkeeping and tax preparation as the worst part of running their company, a SCORE survey found. The majority spend over 41 hours on tax preparation a year, including 40 percent who spend over 80 hours a year, the equivalent of two weeks of lost work. Not surprisingly, many small business owners seek help. But hiring a full-time accountant can be expensive, with an accountant who earns $34,029 in salary costing their company a total of $82,372 a year after benefits, overhead, and training costs are taken into account.
Outsourcing to an accounting firm that bills by the hour can trim this down to an average of $1,000 to $5,000 a month, equivalent to $12,000 to $60,000 a year, depending on the volume of your bookkeeping. You can trim costs further by working with a firm that uses a cloud-based accounting app to sync your accounting data with data from other areas of your business such as point-of-sale transactions, expense reporting and payroll. This reduces the amount of time spent on manual data entry and error correction, minimizing your billable hours. Best-in-class accounting firms can also provide you with analytics insights into your bookkeeping data, helping you identify areas where you can trim expenses, as well as alerting you before you run into cash-flow problems.
Cleaning is another area where businesses can save by outsourcing. Tasks such as office cleaning, carpet cleaning and janitorial duties can be time-consuming and expensive, especially if you have a large commercial property with many floors and rooms. Cleaning costs include not only the direct costs of labor, but also human resources costs such as hiring custodial staff, doing background checks, providing benefits and training workers, which can add up to 40 percent of an individual’s salary. In addition, there is the cost of purchasing and maintaining cleaning materials and making sure materials comply with safety and environmental regulations.
Outsourcing this to a professional cleaning firm eliminates many of these expenses, shifting responsibility for human resources and equipment management tasks to your cleaning provider. Since your provider is splitting these costs between multiple clients, the costs passed on to you can be significantly less. Hotel managers who outsource their cleaning report savings in labor costs of as much as 25 percent.
Security is a third area where outsourcing can save companies money. Security guard service fees vary depending on the type of guard employed. Unarmed guards cost less than armed guards, and off-duty police officers are also more expensive. Hiring a full-time security guard costs an average base pay of $27,510 a year.
Outsourcing can cut these costs considerably. Hiring an unarmed guard from an agency costs an average of $12 to $20 per hour, while hiring an armed guard costs $18 to $25 per hour, and hiring an off-duty police officer costs $40 to $60 per hour. You can further reduce costs by installing a wireless security camera system and hiring a remote security monitoring service. This enables you to schedule remote monitoring services for when your security alarms are tripped or for specific times, such as when your employees leave at the end of a shift, reducing the number of billable hours your security service charges.
Accounting, cleaning and security are three examples of how outsourcing can save your business money. These examples illustrate how outsourcing can lower your expenses by reducing your direct labor costs as well as by transferring costs such as human resources expenses to your service provider. This cost-cutting strategy can be applied to other areas of your business as well, including administrative support, payroll and IT. In general, any routine task that falls outside your core business mission can be considered a candidate for potential outsourcing. Outsourcing these peripheral tasks allows your in-house staff to concentrate on what you do best so that you can get more done while paying less.