Your Labour Costs Are Eating Your Margin: Here's How to Fix It

There's a number we ask every founder we work with to calculate before our first proper conversation: total staff costs as a percentage of total revenue. Not wages alone, but everything: wages, employer's NI, pension contributions, agency costs, overtime, benefits. The full picture.

In most sectors, that number should sit between 25% and 40%. In hospitality, a well-run operation targets 28-35%. When we first assessed one of our founding engagements, that number was 64%. The business was losing money every single month and the founder couldn't work out why, because revenue was growing.

How labour costs become unsustainable

It rarely happens in one decision. Nobody sits down and says "let's make staffing our biggest problem." It happens incrementally, through a series of individually reasonable decisions that compound into a structural issue.

Reactive hiring. The business gets busy, so you hire someone. But you hire based on the peak, not the average. Three months later, you're carrying a full-time salary for a demand pattern that didn't sustain. Multiply this across a couple of years and you're overstaffed by 20-30%.

No link between rotas and revenue. Staff schedules get set by convenience or habit rather than by analysing when revenue actually happens. In hospitality, we regularly see full teams scheduled on quiet Monday lunches because "that's always been the rota." Nobody has mapped staffing to trading patterns.

Paying for roles that don't exist. Job titles and pay grades that were created during a different phase of the business. People promoted into management positions that the business doesn't need at its current size. Overlapping responsibilities where two people are doing what one person could handle with proper processes.

Agency and overtime dependency. When permanent staff are overstretched (often because of poor scheduling), agency staff fill the gaps at 1.5x to 2x the cost. Overtime becomes normal rather than exceptional. These costs sit outside the base payroll and are often invisible in basic bookkeeping.

Properly managed people are the difference between a team and an expense line that's eating your margin.

How to diagnose the problem

Calculate the real number. Pull three months of data minimum. Total all staff-related costs: gross wages, employer's NI, pension, agency, overtime, benefits, training. Divide by total revenue for the same period. If you're above 40% in a service business or above 35% in hospitality, you have a structural issue.

Break it down by department or function. The aggregate number tells you there's a problem. The departmental breakdown tells you where. You might find that front-of-house is well-managed but kitchen costs are out of control, or that admin overhead has crept up while nobody was looking.

Map staffing to revenue by day and shift. Create a simple spreadsheet: for each day of the week, what's your average revenue and how many staff hours are you scheduling? Calculate revenue per labour hour. You'll immediately see which shifts are overstaffed relative to what they bring in.

Audit your roles. List every paid position. For each one, write down what they actually do (not their job title). Look for overlaps, gaps, and roles that existed for a reason that no longer applies. This is uncomfortable but it's where the biggest savings usually hide.

How to fix it without destroying your team

The instinct when labour costs are too high is to cut. Fire people, reduce hours, freeze hiring. Sometimes elements of this are necessary. But cutting without restructuring just creates a different set of problems: overworked remaining staff, service quality drops, and the cycle starts again when you're forced to rehire.

Restructure rotas around revenue data. This is the highest-impact, lowest-pain change. Align your staffing levels to your actual trading patterns. Reduce hours on quiet periods. Add flexibility through split shifts or part-time contracts. Most businesses can save 10-15% on labour costs through rota optimisation alone.

Redefine roles clearly. If two people are doing overlapping work, consolidate the role and redeploy or upskill the other person. Clear job descriptions with measurable responsibilities mean people know what they're accountable for and managers can actually manage performance.

Invest in training and process. A well-trained team on clear processes is more productive than a larger team guessing their way through the day. SOPs and proper training reduce errors, speed up service, and mean you need fewer people to deliver the same output.

Get your HR basics right. Contracts that reflect actual working arrangements. A proper probation framework so hiring mistakes can be corrected early. Performance management that gives you a fair, legal mechanism to address underperformance. Without these, you're stuck carrying problems because you have no structured way to address them.

The target

Every business is different, but as a working benchmark: aim to get total labour costs below 35% of revenue in most service businesses, below 30% in hospitality. Getting from 50%+ to 35% doesn't happen in a month. It's a three to six month restructuring process. But the impact on your bottom line is transformative.

A business doing £300k in revenue that moves labour costs from 50% to 35% just freed up £45k a year. That's the difference between losing money and building a reserve. Between anxiety and breathing room.

Labour cost restructuring is one piece of the puzzle. Without proper management accounts, you won't see the problem until it's too late. And the broader pattern of why businesses fail at this stage almost always involves this exact issue.