Setting up a payroll budget for a business is essential. If you have more employees than you need or overpay the employees, it might eat into profitability. In contrast, if you don’t hire enough people or underpay them, your revenue growth might be impacted. The simplest solution is to get the right balance, examine the payroll costs as a percentage of revenue and analyze it. Doing so will help you to optimize cost and revenue.
Understanding Payroll
Payroll is the total cost of a workforce
which includes salaries, benefits, taxes, and benefits. It is one of the
largest recurring expenses for most businesses, so a business needs to keep the
payroll costs down while ensuring that the productivity, sales, customer
service, revenues, and the overall reputation of a company are not impacted. To
know more about Labor Costs, click here.
Understanding Payroll Percentages
A payroll percentage is the payroll cost as
a percentage of the sales revenue. If this percentage is too high, it might
mean that you are overspending on the payroll. This metric can be used while
making important decisions like when to hire new employees, when to cut back on
added expenses and when to raise wages. The other names for this percentage are
labor cost percentage, payroll to sales percentage, and payroll to revenue
percentage.
Understanding Labor Margin
It is another useful method of looking at
the relationship between revenue and labor costs. It is the difference between
the cost of labor required to generate revenue and sales revenue. The former is
expressed as a percentage of revenue.
Calculating the Payroll Percentage
To find the payroll percentage for your
business, you need to calculate the total payroll expenses and divide the gross
revenue. Then you need to multiply it by 100 to ensure the result is converted
into a percentage. When doing this calculation, you must use the same period
for revenue and expenses. In simple words, Payroll percentage = (Total payroll
expenses/gross revenue) x 100
Is There a Good Payroll Percentage?
There is no specific answer to this
question. It varies by company size, industry, and revenue levels of a company.
You need to find a balance between revenue and payroll costs that is ideal for
your business. Several businesses operate with payroll percentages 15-30, but the
payroll costs might be as high as 50% for some labor-intensive service-based
businesses.
How to Use Payroll Percentage to Access
Employee Productivity?
As a smart business owner, you can use
payroll percentage to assess employee productivity, especially if you have a
labor-intensive business. It would help if you looked at revenue per employee. For
example- if you own a factory, employee productivity might be measured by
looking at the number of widgets produced by every employee in an hour. As
productivity is often linked to revenue, the payroll to sales percentage can indicate
employee productivity. In case of the payroll percentage increases, it might
mean that your company is generating less revenue per employee. It can be a warning
sign that the productivity of your business is decreasing.
Need more? Here
are 6 steps to a better business budget.
Source:
https://www.netsuite.com/portal/resource/articles/financial-management/small-business-payroll-percentage.shtml