Measuring & Maintaining a Healthy Labor Ratio
By Jake Romero
This industry is filled with business owners who are first and foremost passionate pet people. Most of these business owners think, “Whatever it takes to deliver great care is what it costs,” and focusing on key financial measurements tends to get away from them. Unfortunately, so does profit—and if not attended to, so does owning a viable business. It’s honorable and necessary to guard the pets in your care, but it’s also necessary to guard your financial stability and success.
Pet boarding and daycare are service businesses. That means they’re dependent on labor (other than solely an owner). Labor expenses are a huge deal in this industry; they’re often the single biggest expense for pet care businesses. These labor expenses include wages, employee benefits, payroll taxes and more.
What’s a Healthy Labor Ratio?
Many pet care companies spend between 30 and 50% of their revenue on labor, but the ideal ratio for your business depends on a lot of variables. The kinds of services you offer, the owner’s contribution to the business, your geographic region and even the layout of your building all matter. Regardless, it’s critical to intentionally aim for and maintain a healthy labor ratio for the overall health of your business.
Because most owners aren’t watching expenses—including labor—they get distracted and spend too much. Sometimes WAY too much! If a business is spending more on labor than needed, short- and long-term profitability will suffer. What does that mean?
Excessive Labor Costs Directly Affect:
• The business owner’s quality of life. When labor is too high, the owner is the last person to get paid. So, that means your financial future is at risk. Your lifestyle, future credit, capital investment, and even your existing and future home could all be on the line.
• Necessary facility improvements. Your business caters to pets. They tend to put a lot of wear and tear on enclosures, the building, landscaping, yards, fences, etc. You need extra revenue to continuously care for, update and improve your facility. If you are spending too much on labor, you won’t have the money to put into new enclosures, synthetic turf yards, expansions or additional buildings.
• Marketing. Spending too much on labor often leads business owners to cut back on marketing. Reduced marketing means fewer new clients coming in, shrinking your revenue and viability even more.
• Technology and other improvements. Upgraded technology can streamline your business. If you’re spending too much on excessive labor, you won’t have the ability to invest in software or other strategies to improve the way your business operates.
And, in the long term, whether it’s sooner or later, you’re likely going to consider selling your business. When the time comes, profitability is the number one item buyers consider—they’re not going to purchase a business that isn’t generating profit, after all. If your labor costs are particularly bad, it could even repel buyers completely.
Teija Heikkila, principal broker at National Kennel Sales and Appraisals, warns, “High labor cost is the #1 reason for reduced valuation and low sales price for a business in our industry. Buyers focus on the highest possible ROI and if payroll is eating all your profits, it will have a dampening effect on your ability to sell or at what price point you want.”
Can a Labor Ratio be Too Low?
Yes. While long-term understaffing is rare in this industry, it opens a different can of worms and can be very dangerous as well. Without enough caring and well-trained staff, the quality of the pet care you provide will inevitably suffer. Employees will be spread thin, leading to frustration, reduced morale and a volatile work environment. This is a recipe for disaster.
Without enough help, your employees are forced to cut corners and may miss important cues and precautions. Injuries are likely to occur—both to people and pets. Workers’ Compensation Insurance rates needlessly increase, again cutting into what should be profit.
Customers can tell when your employees are unhappy—and customer service free-falls. In come the one-star reviews, tanking your review score and driving away even more business. As the business owner trying to manage this situation, the stress can be insurmountable. If only you had a few more quality staff members to help!
Can You Balance Great Care and Healthy Labor Ratios?
The quality of the care you provide is likely the most important aspect of your business. Thankfully, achieving a healthy labor ratio does not mean sacrificing quality. There is a balancing act between too much labor and too little for the care required to meet your standards. Taking your revenue and labor expenses into consideration goes a long way in your overall success. The most successful pet care companies have realized they can maintain a reasonable labor ratio without reducing the quality of care they provide.
Determining Your Labor Ratio
During COVID, many pet care facilities were forced to reduce to a minimal staffing level or have just begun to re-staff their business. There is an upside. That means you have a “clean slate;” now is the perfect time to assess your labor ratio, where your ideal ratio lies and then staff appropriately.
Maybe the reason business owners don’t monitor their labor ratio carefully is because discovering your current labor ratio can be complicated. It’s a process with a lot of factors; however, the most simple and important equation is total labor costs/total revenue.
Dividing your total revenue by your total labor costs will give you the most value. Categorizing by profit center (boarding, grooming, daycare and training) is even more valuable as it will highlight if one profit stream is underperforming and another overcompensating. Monthly analysis is good, but by pay period is even better. Proactive owners and executives are pulling their 2020 numbers (as unusual of a year as it was) and taking a hard look. Going back to 2019 is recommended as well. The benefits of knowing your labor ratio can’t be overstated.
Jake Romero leads Outstanding Pet Care’s new Labor Reduction Service team. Jake was an Intel analyst as well as an extraordinarily successful pet care business owner. His facility sold for record-breaking multipliers. He achieved this success by first committing to and insisting on quality care, then studying proven processes to look for efficiencies. Outstanding Pet Care’s new labor reduction services guarantee results. If you’re interested in significantly improving your labor ratio while improving the quality of your pet care, go to www.OutstandingPetCare.com/get-in-touch.