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Financial Statement Gymnastics Part III

When comparing labor costs, "the devil is in the details."

This is the third in a series of articles looking at financial statements from the perspective of someone who has been asked to explain why one or more industry "benchmark’’ numbers are so much better or worse than those at his or her own operation. This month’s focus is on labor costs which, like food, may be initially considered somewhat straightforward. But on closer examination, labor costs are very often another area where the "devil lies deep in the details."

When most operators look at the components of their labor costs, the list of line items usually includes: salaries/wages; payroll taxes; benefits; employee meals; and other costs. Let’s consider a few of the leading questions that might be asked about the first three of these items, where the biggest discrepancies often appear.

Some organizations treat senior department management salaries and related costs as an "other controllable expense." When comparing operations, make sure salaried personnel costs are either included or excluded consistently.

How much of the salary/wage component represents actual time worked, as opposed to "nonproductive" time? There are many situations where, because of longevity and/or collective bargaining agreements, employees receive generous benefits in the form of vacation, holiday, sick leave and personal days off. A sound analysis of this component will identify the percentage of work days that are "nominal" to ensure that two situations are comparable.

How much of the labor cost is attributed to temporary or, in the case of colleges and universities, student labor? It is important to separate these costs out, especially if temporary employees are not eligible for benefits or have a separate benefits package. They should be considered as a separate labor component, not lumped in with full-time workers.

How much of the labor cost is subsidized by local, state or federal governments? Many not-for-profit or government-operated institutions are eligible to receive funds, such as those from work study programs or "welfare-to-work" initiatives. In jails and prisons, for example, much of the work is performed by inmates. If such subsidies exist, they should be identified and taken into account.

What portion of labor cost is attributable to overtime? The recent difficulty in securing qualified personnel has resulted in a high level of overtime expense for many foodservice programs. A sound comparison will recognize overtime pay as an inflationary cost factor, and document to what degree it occurs.

Where collective bargaining agreements exist, are shift differentials and premium pay (for working weekends, holidays, etc.) levels a significant factor within the overall labor cost? Because of the complexity of the bargaining agreements, even senior managers often find it difficult to forecast and budget these costs.

Payroll Taxes
Payroll taxes should be directly comparable, but often aren’t. After legally mandated costs are assigned, organizations can vary in the way they treat workers’ comp insurance. For example:

  • Some treat workers’ compensation as a payroll tax (especially if it is a state-operated program); others charge it against benefits.
  • Some organizations are self-insured and may or may not charge back workers’ compensation to individual departments. This is especially true with schools, colleges and universities.
  • Some organizations will show workers’ comp as a separate line item under "other controllable expenses." (The reason often given is that they treat it the same as general liability insurance.)
  • The manner in which workers’ comp costs are calculated vary. Some organizations pass through the actual cost while others charge a percentage of straight-time payroll costs.
  • And, for some organizations, insurance represents a subsidiary business enterprise. The expectation is that it will be financially self-sustaining if not a profit center.

The manner in which organizations treat benefits is literally all over the map. The biggest issue is usually whether or not the organization accrues vacation, holiday, sick leave and personal days off expenses. An analysis of a financial statement must clearly address the distinctions. Why?

  • Because if such expenses are accrued, the foodservice program is charged for them on an ongoing basis. This gives a fairly accurate representation of actual benefit costs for each reporting period. But if those costs are not accrued, the foodservice program is not charged for that time in question until it is actually used. This creates what the accounting profession calls a "contingent liability."
  • Another significant factor in benefits costs has to do with whether employees work a full 12-month year or, in the case of schools, work a nine- or ten-month year, yet receive benefits on a 12-month basis. FM

John Cornyn is a principal with the Cornyn Fasano Group, a foodservice management consulting firm located in Portland, Oregon. He and his partner, Joyce Fasano, coauthored the book Noncommercial Foodservice: An Administrator’s Handbook.

TAGS: Operations
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