How do I track labor costs as a percentage of sales?
The formula is simple. Take your total labor costs for a period, divide by your total sales for the same period, and multiply by 100. If you spent $12,000 on labor last month and brought in $40,000 in sales, your labor percentage is 30%.
The tricky part is defining what counts as labor costs. At minimum, include gross wages. But that understates your true labor expense. Employer payroll taxes add 7.65% for Social Security and Medicare, plus federal and state unemployment taxes. If you provide benefits like health insurance or retirement contributions, those belong in the calculation too. Workers’ comp premiums are directly tied to your payroll and should be included.
Set up your chart of accounts to capture these costs in a way that makes reporting easy. Group all labor-related expenses under a parent category or use consistent naming so you can pull them into a single report. In QuickBooks, you can create a custom report that sums these expenses and compares them to your sales for any date range.
Review this number weekly or at least every pay period. Monthly reviews work for some businesses, but by the time you see a problem, you’ve already lost the opportunity to adjust. A restaurant running 35% labor when the target is 28% needs to know that within days, not weeks. The same applies to service businesses and contractors where labor drives most of your costs.
What the percentage tells you depends on your industry. Restaurants typically aim for 25% to 35%. Professional services firms might run 40% to 50% because people are the product. Contractors vary widely based on how much work is subbed out versus done in-house. Monthly bookkeeping that tracks this metric consistently gives you a baseline for your specific business so you know when something is off.
Watch the trend more than the absolute number. If your labor percentage creeps up over several months while sales stay flat, you’re either overstaffed or underpriced. If it drops sharply, you might be burning out your team or cutting corners on service quality. Neither extreme is sustainable.
Use the data to make decisions. When you see labor running high, dig into the detail. Is it overtime? A new hire who hasn’t hit full productivity yet? Slow sales making fixed labor costs look worse than they are? The percentage flags the issue. Finding the cause requires looking at the underlying numbers.
A bookkeeper near Gentry can help you build reports that track this automatically and flag when you’re outside your target range. Once the system is set up, monitoring takes minutes. The value comes from having accurate numbers you trust enough to act on.
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