How Labour Recovery Works
Let's say you run a manufacturing business. You make products, components, custom jobs etc. Regardless of the product, your team spends hours on the floor building them. You've got stock flying in and out, materials arriving daily, and payroll always rolling.
Now let me ask you this: When you say, 'It costs us $400 to make that,' do you mean $400 in materials? Or does that include the human effort it took to bring it to life?
If you're not actively accounting for labour inside your production costings, there's a decent chance your numbers are lying to you.
Not in an obvious way, but in that slippery, misleading way, where profits look fine until the cash doesn't follow. Where your margins say 'all good' but your bank account tells a different story. Where quoting feels more like educated guessing than strategic pricing. The gap between those two realities? That's often where labour recovery lives.
→ What Is Labour Recovery?
→ Why Bother?
→ What It Looks Like In Practice
→Why It Matters More Than You Think
→How Most Businesses Get It Wrong
→ Where CFO Dynamics Comes In
→ The Big Shift
→ Final Thought
What Is Labour Recovery?
Put simply, labour recovery is the process of taking the cost of your team's time and applying it to the value of what they produce. So instead of just tracking what your workers cost in wages, you're also recognising the value they've added to the goods you now hold as stock.
Imagine your team manufactures a pump. It requires $400 worth of raw materials and takes 3 hours to assemble. If you're paying your people $50/hour, that's $150 in labour.
The pump didn't cost you $400. It cost you $550. That extra $150? That's what you're recovering.
Now here's where the magic happens. That $150 doesn't just sit in limbo. When you complete the job, your system does two things:
- It adds the $150 to the value of your finished stock item, because that's now what it truly cost to produce.
- It credits that $150 to your P&L under a labour recovery account, effectively offsetting the wage expense that's already been accounted for when you paid your staff.
Without that second bit, you’d be double-counting your wages and your numbers will be way off.
Why Bother?
Without labour recovery, you're undercooking your production costs, inflating your cost of goods sold (COGS), and potentially basing business-critical decisions on bad intel.
I can't tell you how often we've seen manufacturing businesses say:
'We're profitable! Look at the margin!'
Only to realise they've been counting their labour costs twice and didn't even know it. OR worse, they've been leaving labour out of their stock evaluation.
Your people don't work for free. Their effort adds value. That value needs to be captured somewhere. Labour recovery is how.
And it really isn't just another account trick. There is real-world impact. Once you have a system in place to track and recover labour, you gain a level of visibility over your business most owners don't even realise they're missing,
You can start to see:
- How much your team actually produced this month
- Whether your labour is being deployed
- How accurate your quotes really are
- If your factory output is matching payroll outflows
This isn't fluff. It's the kind of clarity that drives confident decisions.
What It Looks Like In Practice
Let's pull back the curtain.
In a well-run manufacturing business, you'll typically have:
- Bills of Materials (BOMs), which are like recipes for each product
- Works Orders, which tell the team what to make and how
- A perpetual stock system, meaning stock levels and values will update in real time
- A method of tracking time, whether manually, digitally or via machines.
When your team starts a job they're issued a works order. They record the materials used and the hours worked. When the job is complete your system:
- Reduces the raw materials in stock.
- Adds a finished good to inventory, valued at materials plus labour
- Records a labour recovery entry to offset the cost of the labour
At a financial level, you've just moved $550 into stock: $400 from materials, $150 from labour.
Then, when that product is eventually sold, the entire $550 is released from inventory into COGS.
If you hadn't done the labour recovery? Your COGS would still show $550, but your wages would've already hit the P&L earlier, meaning the labour is getting counted twice. That's not just a reporting issue - it warps your entire sense of profitability.
Why It Matters More Than You Think
One of the most overlooked truths about labour recovery is this: it tracks what your team produces, not what you sell.
If you have a month where your team is flat out building stock but sales are quiet, you'll still see a spike in labour recovery on your P&L. That's not a mistake, it's insight.
You're seeing the value your team created. Stock is building, your asset base is growing. Sales will catch up. But it is telling you something really important: your labour is still delivering value, even if the cash hasn't quite yet hit the bank.
Over time, your labour recovery and wage bill should more or less mirror each other. If you're paying $80,000 in wages a month, but only recovering $45,000? You've got a problem, either in productivity, utilisation, or tracking, which are all conversations worth having.
How Most Businesses Get It Wrong
You'd be surprised how many businesses are technically 'doing labour recovery', but it's so badly configured that it's almost worse than not doing it at all.
Here are the usual offenders (in no particular order):
- No logic behind the recovery rate: Some businesses pick a number out of thin air - $100/hour 'because it feels about right'. But when you compare it to actual wage costs and on-costs, it's way off.
- No time tracking: If staff don't record their hours against jobs, how do you know what to recover??
- Only recovering on completed sales: Recovery happens when the work is done. Not when the invoice is sent or received.
- No reconciliation: If no one's comparing wages paid vs labour recovered, inefficiencies go undetected.
Done well, labour recovery gives you visibility. Done badly, it gives you false confidence and that's arguably worse.
Where CFO Dynamics Comes In
This is the part where we step in. As an outsourced CFO, this is one of the most valuable things we implement for manufacturing clients because it doesn't just fix a broken number - it re-engineers how you think about cost, margin, production, quoting, staffing and stock.
Here's what we actually do.
1. First, we help you build the right logic.
Every business is different. Some have fast-turnaround jobs, others run large-scale projects. We tailor a recovery that suits your operations, not a one-size-fits-none system.
We look at your team's structure, your existing time tracking, how BOMs are set up, and how jobs flow through the floor. From there, we design recovery logic that fits.
2. Then, we set the right hourly rate.
Most clients are shocked when we show them what their actual pay-per hour labour cost is. We factor in base wages, super, leave, public holidays, workers comp, admin time, and downtime. What you thought was $45/hour might actually be $67. And that $22 gap? It's the difference between quoting profitability and giving your margin away before the job even starts.
3. We build the reporting.
We don't just implement the system and walk away. We build live dashboards and monthly reporting that shows you:
- How much labour you've recovered
- How that compares to wages paid
- What your recovery rate is by team or product
- Where the shortfalls (or over-recoveries) are happening.
It's a strategic management tool, not just a finance one.
4. We connect it to your quoting and operations.
Once labour recovery is accurate and consistent, we feed that data back into your quoting model. Suddenly your quotes aren't educated guesses, they're reflections of real numbers. You know what a job should take, how much it'll actually cost, and what you need to charge to make it worthwhile.
This isn't just accounting. This is how you scale a profitable manufacturing business with confidence.
The Big Shift
When a client of ours first implements labour recovery properly, the change is often profound.
Margins suddenly make sense. Variances are explainable. Teams are more accountable. Owners stop asking, 'Where's the money going?' and start leading with clarity.
It's not uncommon for us to uncover six-figure inefficiencies in the first six months, simply because the business never had a clear view of what was being produced vs what was being paid.
That's the power of good financial plumbing. It doesn't just tell you what happened, it helps steer what happens next.
Final Thought
Labour recovery isn't just about cleaning up your profit and loss. It's about building a smarter business.
It's about
- Knowing what things really cost
- Quoting with confidence
- Holding teams accountable
- Running operations aligned with finance
- And making decisions based on truth, not assumption
If you're a manufacturing business owner and you've been flying a little blind here, you're not alone. But the fix is very doable, and incredibly worthwhile.
At CFO Dynamics, we help businesses like yours get under the hood, sort the systems, and get the numbers telling the right story.
When the numbers are right, everything else follows.
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