Labor Day Is a Good Time to Ask: Is Your Labor Actually Profitable?
Labor Day is the one holiday named after work. It's also the one day a year almost nobody stops to ask what their work actually costs them.
Payroll is the biggest line on most P&Ls. Bigger than rent. Bigger than software. Bigger than anything you'd actually shop around for. And it's the number owners look at least, because it feels fixed. You have the team you have.
It isn't fixed. It's the most controllable large number in your business, and the last four months of the year are exactly when it gets away from you: seasonal hires, holiday overtime, year end bonuses, a Q4 push that adds cost faster than it adds revenue.
Here's how to get ahead of it.
Start with one number: labor cost as a percentage of revenue
Take everything you spend on people. Divide by revenue for the same period.
Everything means everything: gross wages, your own comp, payroll taxes, benefits, workers comp, retirement match, and any contractor who's been on your books long enough to basically be staff. Skip any of those and your number looks better than it is. That's why most owners quote a percentage that's five points too low.
Run it monthly for the last twelve months, not just year to date. One annual number hides the trend, and the trend is the whole point.
What "good" looks like, with a catch
Ranges vary by industry, and anyone who hands you one universal number is selling something. Rough orientation: service businesses often land 40 to 60 percent, construction and trades lower because materials carry weight, restaurants around 30 percent for labor alone.
The catch: your own trend beats any industry average. 44 percent last September, 51 percent this September? That's a real finding. No benchmark tells you if those seven extra points bought you anything.
The better question: what does each labor dollar produce?
Percentage of revenue tells you what labor costs. It doesn't tell you what labor earns.
For that, divide gross profit by total labor cost. Spend $500,000 on people, produce $1,000,000 in gross profit, every labor dollar is returning two. Track it over time and hiring stops being a gut call. You can see whether the last three hires actually made the business more productive, or whether you just spread the same work across more payroll.
It's also the honest way to evaluate your own role. Owners who cut their own pay to protect the ratio usually make the business look healthier than it is.
Four signs your labor cost is drifting
Overtime stopped being the exception. Occasional overtime is flexibility. Standing overtime is understaffing, and it's the most expensive way to fund it.
Revenue is up, profit isn't. The classic one. Growth that doesn't reach the bottom line is almost always labor, and it's almost always invisible until someone runs the ratio.
Contractors who are actually permanent. A 1099 that's renewed for two years is a hiring decision you made by accident, usually at a higher rate than an employee, and sometimes with classification risk attached.
Nobody owns the number. If your payroll percentage lives only in your head and gets checked when something feels off, it isn't being managed. It's being noticed.
What to do in the next few weeks
Q4 is when labor decisions get made fast and reviewed never. Before it starts:
Run labor cost as a percentage of revenue by month for the last twelve months, and look at the shape of the line.
Calculate gross profit per labor dollar for the same period.
List every contractor who's billed you more than six months, and decide on purpose what they should be.
Price your holiday staffing plan before you commit to it, overtime included, not after.
Set the bonus pool now, based on the numbers you actually have, not in December based on how the year felt.
None of this needs new software. It needs clean books and one afternoon.
Where a bookkeeper ends and a CFO starts
Your bookkeeper makes this possible. If payroll is categorized correctly, contractors are coded consistently, and the months close on time, the numbers above take an hour to produce. If the books are messy, none of this analysis means anything.
But a bookkeeper's job is to record what happened. Deciding whether to hire, what the ratio should be next year, whether the Q4 push is worth its labor cost, that's CFO work. You need both, and they're different jobs.
If you can't answer "what percentage of my revenue goes to people, and is that number getting better or worse," that's the gap. It's a solvable one.
Talk to us
We work with growth stage businesses that have outgrown "the books are done" and need someone looking forward instead of backward. If that's you, tell us about your business and we'll tell you honestly whether CFO level support would earn its cost.
Happy Labor Day from all of us at Gramuglia Bookkeeping. Enjoy the day off, then let's make the work pay.
