Should You Bother Allocating Labor Costs in Your Business?

When you’re really small, you can often save time and money in ways that larger businesses can’t. Need an all-hands meeting? You can turn your chairs around and talk to all five of your employees easily. Not sure what your customers think about your new product? The odds are good you probably know many of them personally and can just ask the next time you see them around town.

Despite all this, there are other areas where it makes sense to start treating your business as though it were more complex than it is at the moment. Developing formal processes for things like onboarding new employees, managing low performers, and employee terminations are all good to think about before they become unwieldy or problematic. Labor cost allocation can definitely fall into this category.

What is labor allocation and why does it matter?

Story time! (You’re never too old for story time.)

Laura and Nathan both make $20 an hour working as yeti groomers. Once you know how many yetis they groomed this month, this should make it easy to tell whether or not yeti grooming is becoming increasingly profitable for your Mythical Spa, right?

Not quite. Laura spent several hours working towards her claw manicurist license, at your request. Nathan caught fleas from a customer and stayed home for two days, using sick time. Both spent a day helping out in the griffin preening department when they were shorthanded, and Laura, who dabbles in photography in her free time, took new headshots of all your employees to update your website.

Without labor allocation, you’ll never really know how well your yeti grooming is doing from a financial perspective.

Labor allocation for Laura and Nathan.

When Laura and Nathan clock in, they don’t just indicate the time, they also indicate what they’re spending that time on. Laura works in yeti grooming for four hours, takes an hour unpaid lunch break, does one hour of paid training, then goes back to the yeti grooming office for another three hours.

Nathan is out with fleas that day, but he’s asked you to use his accrued sick time for the eight hours he would normally work. Sick time, training time, and work time in a given department are all categories to which hours can be allocated.

Why does this matter?

• You’ll understand the work your employees are doing and how they spend their time. (Nathan always seems to finish grooming his yetis more quickly than Laura.)
• You’ll understand what you’re spending your payroll money on, and can track changes and trends as they occur. (Marketing is taking up more and more time. Maybe Laura would be interested in doing that full time?)
• You’ll be better equipped to notice any kind of fraud or time theft. (This says Nathan spent two hours on training … but nobody approved him for that.)
• You can be smarter about budgeting and hiring for the future. (We need to bring on more griffin preeners on a seasonal basis next winter.)

What if I’m really small?

Allocation can be worth the time, even if you don’t have any employees yet. Tracking how you spend your own time, even if it’s just in a spreadsheet, is an extremely valuable practice. Spending most of your time on marketing and not enough time on developing your product? It might be time to bring on an employee.

Spending too much time playing phone tag with people to set up appointments? A virtual assistant could be a good opportunity to outsource some of that without having to bring someone on board full-time. As with employees, you can look at trends and uncover whether you’re becoming more efficient in certain areas or whether they’re becoming an increasingly large part of your work.

What if I’m not quite that small?

If you’ve gotten beyond your first employee or five, Ye Olde Spreadsheet isn’t going to be sufficient for your purposes anymore. In this case, it’s worth integrating labor allocation into your timekeeping. It may help to keep things as simple as possible at first: work, training, paid time off. If you have employees doing hourly work that’s billable to specific clients, you’ll obviously want to track this as well. (Failure to do so will result in some very unhappy client feedback.)

Accurate timekeeping is important for businesses of every size.

Looking for guidance on this? Our Timekeeping Compliance Checklist will help you ensure yours makes the grade.

If you're a small business owner or HR Manager trying to wrap your head around the complex world of time and attendance, check out our comprehensive resource page, Time and Attendance - A Complete Guide. This page spells out literally everything you'd need to know about time and attendance, including timekeeping procedures, time clocks, employee scheduling, compliance considerations, emerging trends and a whole bunch more.