Today…how to keep your payroll expenses under control.
Your payroll expenses can make or break your business, so you have to keep them under control. One approach is to calculate them as a percentage of gross sales, but there’s no one-size-fits-all rule for what that percentage should be. Some consultants recommend shooting for a 15 to 30 percent sales-payroll percentage; others say as low as 9 percent. What’s important isn’t the exact percentage; it’s how you apply it to improve your bottom line.
Different industries exist in very different employment worlds. Fast-food restaurants are notorious for lower wages and constant turnover. Service industries have higher payroll costs because if they don’t have staff, they don’t generate revenue. Here are payroll percentages for some industries as an example:
- Retail: 10 to 20 percent of gross sales revenue
- Hospitality: 30 percent
- Restaurants: 30 percent
Rather than looking at averages, look at what the best, most profitable companies in your industry are doing. At trade shows, talk to top performers from outside your region. Browse trade journals for financial information about the top companies. Talk to your accountant or financial consultant about what they are seeing in the industry.
Percentages are guidelines, not laws handed down on stone tablets. How you apply the percentage is more important than which percentage you use.
Let’s say your industry average shows payroll vs. sales running between 15 and 20 percent. The next step is to calculate the percentage for your own company. List all employee costs — benefits, salary and taxes — and don’t forget to include your own. Then add up your gross sales revenue, which is the total income from sales, unadjusted for deductions such as returned merchandise.
If your sales-to-payroll percentage is healthy for your field, wonderful. If you’re pushing into the red zone, don’t automatically assume you have to slash staff or wages. Look closely at the reasons the percentage is out of sync:
- Your long-term growth strategy requires employed high-powered salespeople or IT experts, so you have to pay more than the average.
- You’re understaffed. As a result, your employees are racking up overtime, which boosts your payroll costs.
- Your employees are inefficient.
- You’ve added salespeople to boost sales, but the payroll growth is outpacing sales growth.
- If paying for top people will boost your future sales, a high payroll/sales percentage may be something you can live with for a while. Other reasons may indicate problems you have to fix to stay profitable.
If the percentage convinces you there’s a problem, look at ways you can bring the figure down:
- Boost productivity with rewards for employee performance. These can be anything from a merit-based bonus to a day off.
- Cross-train employees so that they can cover for each other if someone calls in sick or there’s a sudden rush of customers.
- Study the workday shift by shift. See if there are times you’re overstaffed or so short-handed that your team can’t deliver good service. Adjust accordingly.
- Make more use of part-time, freelance or temporary help so you don’t have to pay benefits. There are legal distinctions between freelancers and employees, so it’s important not to confuse the two. That can bring on a world of legal hurt.
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