Cut Payroll without Losing Employees in a Service-Based Small Business

Just because sales are down or threatening to go down, doesn’t mean there’s less work. In fact, there may be even more work as you scramble to improve sales and develop faster and better service delivered more frugally. So how can we possibly cut payroll costs? Furthermore, we mostly like our employees, and don’t want to lose them. So, given that we want to reduce costs and payroll is often the largest small business expense, what can we do to cut payroll without losing valued employees? I’ll include some real numbers, so you can see we’re talking real dollars. According to the State of Working PA, the average PA salary at the end of 2007 (the most recent I found) was $14.85 per hour. I used an average overhead of 38% to account for all retirement, FICA, workmen’s comp., and so forth. Your numbers will vary. These numbers are rough, if you want help with estimating and planning, just give me a call.

You can cut payroll without losing employees, if you…

Stop overtime. You can make a blanket policy that there be no overtime without specific approval on each instance. This may require a little more precise thinking in your work scheduling to get everything done. A single employee, who works even 2 hours overtime per week, will cost you $3,078 per year in time-and-a-half overtime.

Cut hours across the board. It is possible to institute a 35-hour work week. So for example, everyone takes off Friday afternoons or half-days staggered throughout the week if you need coverage. That’s also a 12.5% payroll cost reduction. You might be able to soften the employee’s concerns with instituting a 4-day work week, 9-hour day so that they get one less commute day. This will save $5,336 per average employee per year.

Freeze wages. Okay not a cut, but telling people there will be no increases this year will keep your cost from increasing by $1,281 per employee, figuring a 3% raise on an average employee.

Close the office for a week. Some restaurants close when the owner goes on vacation. Some offices and factories close over the Christmas holidays. The employees must then use their vacation time or personal time, to cover. If they have none, it’s time off without pay. This strategy has the benefit that your other operating costs (heat, electric, etc.) can be reduced that week along with payroll. A one-week shutdown will cut payroll $821 per employee not including additional operating costs saved. One of my small business owner clients uses this time to do strategic planning for the next year.

Suspend the bonus. If you have a bonus program, make sure it is tied to profitability goals and increases in profits. That way if the company misses the target, you don’t owe the employees for the bonus. And if you and the employees do manage to maintain or build profits, you’ll be glad to share. A 5% missed bonus saves you $1,693.

Strengthen your project accounting. I have never worked with a client who was billing ALL the work their clients had agreed to pay. I’m not talking about clients who don’t pay. This is NOT SENDING THE BILL for work completed. See my article: Undercharging Clients Can Be a Chronic Condition.

One client had an average of 1/2 hour per day, per employee where the time cards did not match the job cards billed to the client. This is missed income that the client has already agreed to pay! If your hourly billed rate per employee is even a modest $40, you’re missing $5,000 in billings and possibly paying your employees $2,565 that you didn’t bill!

Send them home early. If you have a lull in the afternoon, send some of the employees home early. This has the benefit of helping to match the work level with the expense level as well as cutting costs. Even 2 hours a week per employee would save $2,050 in a year.

Be slow to rehire. If someone does leave, don’t rush to replace them. Take your time. See if the remaining employees can handle the load. Are there activities that are not critical right now as you spread that load to others? Come up with a sales or profit measure of when you really will need that employee replaced. If this person filled a critical, skilled position, such as accounting, see if it can be replaced with a part-time, temporary contractor or job share with a sister company. If you could delay hiring a replacement person by 3 months, you’ll get a total savings of $10,673.

Improve your time and attendance management. Make sure that you can account for the hours people actually work. Time Trex, an automated Payroll and Time Management system, claims to save an average of $1,095 per employee. A time clock will recover time and money lost by employees coming in late, taking long lunches and breaks, and leaving late to get overtime. Plus there may be errors due to manual calculation of timecards. Sadly, only those in the employee’s favor will go unreported. Even a 1% error factor can cut payroll $200 per employee per year. Check out Time Trex’s calculator.

None of these numbers can be considered chump change. If you want to cut payroll costs without losing your employees, these are worth considering and implementing. What are your ideas?

Now stop reading about how to cut payroll and start doing! Let’s create your personal profit strategies for growing profit. Call small business profitability coach Merra Lee Moffitt, CFP®. She can be reached at, 888-920-2030 or by email at

“Seek new clients, seize better income, capture more profit”

This entry was posted on Saturday, December 13th, 2008 at 2:53 pm and is filed under Collect Cash. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

2 Responses to “Cut Payroll without Losing Employees in a Service-Based Small Business”

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  2. Cut Payroll Costs Without Cutting Employees » SMBtime Says:

    [...] a recent article in the Capture Business Profits blog, Merra Lee Moffitt points out a down economy doesn’t necessarily mean a reduction in the [...]

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