How to Estimate Labor Costs for Your Small Business

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Estimating Labor Costs: A Guide for Small Businesses

In this section, we provide comprehensive guidance on estimating labor costs for your small business. We cover different types of labor costs, methods to calculate them, and strategies to manage and optimize these costs for business success.

How to Estimate Labor Costs for Your Small Business – Transcript

In the last video in this small business planning course, we looked at costs directly related to your revenue. But to accurately figure out how much money your business is going to make, you're going to need to look at all of the costs that your business is going to incur, including the costs outside of creating a product or service. And in this video, we're going to start that process by forecasting what your business will spend on labor.

Hey everybody, Will Scheren here from Small Business Startup Guide by TRUiC. This video is part of a larger course dedicated to helping small business owners cut through the noise and get to the essentials of starting and operating their business. If that sounds like it would be really useful for you, be sure to like and subscribe. 

Labor costs cover the salaries and related costs paid to yourself, your employees, and other contracted workers. Keep in mind that we have already accounted for some labor costs in the course — the ones directly associated with producing a product or service. So if you haven't watched that video and you want to follow along with us, go back and take a look. 

Putting together your personnel plan is a valuable opportunity to think through your staffing needs — now and in the future. How much will you pay your staff? When do you need to add new positions? How will those positions be compensated? Does it make more sense to hire full-time employees or use contracted workers? 

Before beginning to plan your labor costs, depending on how big your company is, decide whether you want to list every employee by name or title or if grouping them into common roles or departments makes more sense. 

At TRUiC our mission is to offer all our resources and information for free - but we support our work by using affiliate links, meaning we earn a commission on many of the amazing deals we’ve negotiated for you. Full transparency, LivePlan.com is one such affiliate partner. Link in description below. 

To account for labor costs in LivePlan.com, Click on the “Forecast” tab, and then the “Labor” sub-tab. To add a staff member, click the “Add Personnel” button. Start by letting LivePlan know whether you want to add a single employee or a group of employees. Confirm with LivePlan that this will be a regular labor position and not directly tied to a direct cost of producing a unit of your product or service. We recommend taking care of direct labor in the “Direct Costs” tab. 

Then, confirm if they should be treated as an on-staff employee or a contracted worker, and confirm the addition of the employee to add the information to your financial forecast. Then enter how much they will be paid each month or each year, whether it will be a constant amount or an amount that varies month to month, and confirm the start date as well as if you would like to plan for them to receive an annual raise as a percentage of their compensation. Repeat this process for each of the employees or groups of employees that you plan to include in your business. 

Before closing out the “Personnel” tab, you'll need to consider the burden rate for your staff. The burden rate is an additional cost that will be applied to each of your on-staff employees but not any of your contracted workers. 

Salaries and wages are far from the only expense associated with having employees. Depending on your location, other employee-related expenses may include payroll taxes, worker's compensation insurance, health insurance, and other benefits and taxes. These expenses need to be reflected in your financial projections. 

It's not necessary to try to predict these expenses and precise detail. Instead, financial planners typically use what's called a burden rate. This is just a simple percentage of total employee compensation that covers these expenses. Since burden rates will vary between businesses, it's best to contact an accountant and explain your plans to them and get them to make an estimation as to how much of your payroll will incur an additional tax expense. And if you plan to provide insurance and or other benefits to your employees, you'll need to reach out to providers of those services and explain to them how many employees you'll intend to have to get an estimation for their service. 

You'll see that video a few videos from now if you're moving through the course. After speaking to an accountant and benefits vendors, combine the tax costs and the estimated cost of employee benefits and let LivePlan know how you'd like for it to account as a percentage of your labor costs. After adding each labor cost and the burden rate, you'll see that the costs have been added to your “Direct Cost” dashboard. 

In the next video in the course, we'll be covering how to forecast your other business expenses on LivePlan.com. 

This video is part of a step-by-step course that gives small business owners all of the essential information to start and operate their business. We've provided a link for you to get access to all of the free and discounted business tools that we mentioned in the course below this video. 

Be sure to like and subscribe to get more of this content. We'll see you in the next video, and if you have any questions, let us know.