By: TimeForge Labor Management
When scheduling for a retail business, it’s important to be precise. One of the key metrics that businesses use is sales per labor hour (SPLH), which measures the dollar value of sales for each labor hour. Understanding this metric can ultimately help ensure a business has just the right level of staffing. Below, we outline the sales per labor hour formula and how to use it.
What is the Sales Per Labor Hour Formula?
SPLH is calculated by dividing a store’s total sales by their total labor hours for a given period. The formula for this is:
Total sales revenue / Total labor hours = Sales per labor hour
What this means is that merchants can actually calculate sales per labor hour in several different ways, depending on what they’re interested in. They can calculate hourly, daily, weekly, monthly, or even yearly SPLH. Each of these numbers will give a snapshot of how efficiently a business is staffed during that time frame. The important thing to remember is that the given period of time used for the top half of the equation needs to be the same as the bottom. Meaning, if they look up their sales for a specific day, they don’t want to divide it by the labor hours for a different day. That wouldn’t give them an accurate picture of how efficient their business was on either day.
Let’s look at some examples of calculating sales per labor hour.
Sales Per Labor Hour Formula Examples
Let’s say we run a small coffee shop and our 2 scheduled baristas sell $300 worth of coffee from 8AM to 9AM. Our calculation for that hour will look like this:
$300 in sales / 2 labor hours = $150 SPLH
Remember, the bottom number is total labor hours worked, not the number of employees. But because we’re only looking at an hour and have two employees, it works out to 2 labor hours worked.
Now, let’s consider our sales per labor hour for the entire day. Let’s say we scheduled 3 staff with 8-hour shifts each, for a total of 24 labor hours. Our total sales for the day was $2,240. This time, our sales per labor hour formula filled in will look like this:
$2,240 in sales / 24 labor hours = $93 SPLH
As you can see, our SPLH during the morning coffee rush was a good deal higher than the day’s average. We were making more money per labor hour at that time. Later, sales slowed down to normal levels, resulting in a lower average for the day. This is completely normal for many types of businesses. SPLH will vary from hour to hour, day to day. Therefore, it’s important to consider sales per hour across different time frames. Merchants always want their staffing levels to match how busy their business is. The key is ensuring that they have just enough staff to keep customers happy but not so many that they’re wasting money on labor they don’t need. When businesses talk about “optimizing” their labor, this is what they mean. Staffing the right people at the right times to make the maximum amount of profit.
Using the Sales Per Labor Hour Formula to Increase Profits
The whole point of calculating sales per labor hour is to take a snapshot of the productivity and efficiency of a business. Once the merchant has a sense for their daily or weekly SPLH, they can start planning around how to increase that number without impacting customers’ experiences. Increasing SPLH means increasing the amount of money made for the amount of money spent on labor. Or, put another way, it means increasing the profitability of a business. Instead of calculating SPLH, flip the formula to solve for labor hours, instead:
Anticipated sales / SPLH target = Labor hours to schedule
For example, let’s say we wanted to increase our SPLH from $90 to $100. Let’s also say that we anticipate making about $17,500 in sales in a week. We simply divide $17,500 by $100 to get a total of 175 labor hours. That’s the max hours we want to schedule that week in order to hit that $100 SPLH mark. (Roughly 22 eight-hour shifts.) Of course, they’ll want to schedule more of those hours during their peak business times, which is why it’s still important to understand hourly and daily sales trends. By scheduling labor more efficiently throughout the day, they can maximize profits.
If they use the sales per labor hour formula regularly and find that the numbers are low for their business, they might have a problem. It may mean that they’ve got a new manager who doesn’t know best scheduling practices. Or, it may mean that they simply have too many staff on hand for the time of day or season.
How to Anticipate Hourly, Daily, and Weekly Sales
So, if they need to anticipate their sales in order to better plan labor, what’s the secret to getting it right? Seasoned managers will often spend hours each week planning out their schedules using spreadsheet templates. They tend to know when their restaurant or store will be busy, and they try to plan out their resources accordingly. They might use a rolling 6-week sales average to try and anticipate sales.
Technology offers a better way.
Artificial intelligence (AI) and machine learning have come a long way in the past decade. With historical sales data, a labor management system with sales forecasting capabilities can predict future sales with much greater accuracy and in much shorter time than managers can accomplish on their own. The system must be integrated with the point of sale, which means it should pull sales data from the POS on a regular basis and use that data to make calculations and predict future sales. If this piques their interest, we suggest reading up on What is sales forecasting? and Types of Sales Forecasting. The bottom line is that technology is by far the best way to predict future sales, and it’s not as difficult as you’d think. This is because the AI does all the heavy lifting.
The Importance of Accurate Sales Per Labor Hour Calculations
The sales per labor hour formula can be a useful measure of how efficiently a business is staffed, but it does require accurate numbers to be effective. The same is true when calculating how many labor hours are needed based on a target SPLH. If merchants are overly optimistic in sales predictions, they’ll end up with too many scheduled shifts. If they underestimate sales, their employees could end up getting slammed during a rush, and customer experiences could suffer. That’s why it’s important they know actual and projected sales – and why their projections need to be accurate.
If your customers operate in an area with fair workweek or predictive scheduling laws, it is likely they’re having an even harder time keeping labor aligned with anticipated demand. Laws in fair workweek areas require employers to post schedules as early as 3 weeks out. These laws also prohibit employers from making last-minute changes to posted schedules. This means that, in order to avoid being “nickeled and dimed” by penalties, it’s even more important to be able to accurately predict labor needs in advance. That’s why we highly recommend using sales forecasting to predict labor requirements.
We hope this was helpful to you in better understanding the sales per labor hour formula and its many uses. For more tips and tricks on dealing with secure scheduling laws, check out our post on fair workweek and shift swaps.