Financial Performance Measure – Labor-to-Sales Ratio
Janitorial companies generally measure success in three broad categories – customer satisfaction, team member engagement/satisfaction, and financial performance. There is a good argument that these measures are equally important and interdependent. Monitoring and managing 3-5 key indicators/measures is helpful in each category. This article will explore arguably the most important financial performance ratio – labor-to-sales ratio.
Labor-to-Sales Ratio Definition
We define the labor-to-sales ratio as follows:
Total Direct Labor Costs divided by Total Revenue (Sales) From Janitorial Services
NOTE: For this ratio, we exclude product resale revenue
In our company, we track labor costs in five categories:
- Regular Labor Costs
- Overtime Labor Costs
- Direct Manager Labor Costs (used to track labor when we have an on-site manager assigned to a single customer)
- Vacation Labor Costs
- Holiday Labor Costs
The sum of these categories is Total Direct Labor Cost. This number represents all wages associated with delivering service to customers.
Labor to Sales Example
Below is an example labor-to-sales calculation:
Monthly Sales (Revenue) from Contracted Services = $160,000
+ Monthly Additional Services Revenue = $15,000
= Total Monthly Revenue from Janitorial Services = $175,000
Monthly Regular Labor Cost = $84,000
+ Monthly OT Labor Costs = $1,050
+ Monthly Direct Manager Labor Cost = $2,990
+ Monthly Vacation Labor Costs = $950
+ Monthly Holiday Labor Costs = $350
= Total Monthly Direct Labor Costs = $89,340
Labor-to-Sales Ratio = $89,340/$175,000 = 51.1%
Labor-to-Sales Ratio Target
Because every janitorial company has a unique customer mix and competitive environment, defining benchmarks can be a bit challenging. However, based on our company’s experience and working with other companies, a labor-to-sales ratio of 48% – 55% seems to be a good target. Below are a few additional notes regarding the use and calculation of this ratio:
- Vary Your Budget Based on Number of Work Days – We recommend establishing a monthly target (budget) for this ratio based on the number of work days in each month. For example, certain months (March, August, October) have more work days, so your labor-to-sales ratio for those months will be a bit higher than months with fewer work days (February, November, December).
- Track and Discuss Monthly – We recommend tracking this ratio monthly. As previously mentioned, this ratio should be one of your company’s most important financial performance measures. We also suggest sharing this information with your key operational leaders, making them aware of the importance of this ratio and how to manage it appropriately.
- Track at the Job Level – If possible, we recommend tracking this ratio at the job (or customer level). By monitoring at the job level, you can pinpoint potential trends and issues needing attention. If you track the job level, please be aware that larger jobs may have a labor-to-sales ratio approaching 60% or greater, while very small jobs may have ratios less than 45%.
Managing Your Labor-to-Sales Ratio
In a previous article the-3-legged-stool-janitorial-profit-margins, we discussed the importance of carefully managing three factors at the job (or customer) level – (1) Daily Work Hours, (2) Team Member Wages, and (3) Monthly Price Paid by the Customer. We refer to this as the 3-Legged Stool of Janitorial Margins. It is through managing these factors that you can control your labor-to-sales ratio.
For example, suppose you are studying your monthly customer list and notice a customer whose labor-to-sales ratio is trending higher than other customers of similar size. In that case, you may wish to discuss this with your field leader. First, investigate if the daily work hours are greater than expected. If so, this might point to additional training needed to help the cleaner/team work more efficiently. Next, review your cleaner/team’s rate of pay. And while you most certainly can’t reduce a team member’s wage, at least you will know why the ratio is trending higher. Lastly, and typically because wages have increased, it might be time to plan a meeting with the customer to discuss a price increase.
In an industry where labor accounts for the vast majority of our costs, it is wise to have a plan to monitor and control the cost of labor. The labor-to-sales ratio provides a measure for which you and your team can set targets, monitor monthly, and make corrections as needed. Teach your team about this ratio and its importance, and you should see your profit margins climb.
