How to Set the Right Payroll Budget for Your Business

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.



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