We love doing payrolls! – says no one ever.
Or maybe except us?
But the truth is, one of the most challenging things in running a business is dealing with payroll! Payroll eats up a huge part of business expenses and should be managed carefully as it can make or break a business. The good news is there’s a way around it. You just need to know the percentage of revenue that should be spent on payroll called the Labour Budget %.
Payroll isn’t just about labour costs – it also includes benefits, bonuses, and owner drawings. But don’t look at wages as an expense! Think of it as an investment and remember that your employees are the heart of your business.
To be safe, your payroll expenses should play around 15 to 30 percent of your revenue, depending on the type of your business and the kind of industry you are in. It can be difficult to keep a healthy payroll percentage with all the factors you need to consider but it’s important to find the right equilibrium. There’s a thin line between having too many employees in an attempt to maximise sales and production and not having enough employees to save on labour costs. You need to be smack in the middle!
You divide your total payroll by your gross revenue:
Gross revenue / total payroll = payroll percentage
You need to keep your labour costs or actual payroll percentage within your prescribed labour budget % to make sure the business still keeps a portion of its revenue in its pockets.
Look at your industry’s benchmarks, your gross revenue, and the sales number each employee brings. You need to consider other important factors like taxes, benefits, sick and leave days, vacation pay, and insurance as well.
Determine your average sales and the hours you think your staff need to deliver this average sales. You can adjust your payroll effectively at least every quarter if you monitor your labour budget %. You will find out if your business is still making money after wages.
There’s a lot of nitty gritty involved in payroll and you can use some available calculators online to help you. However, if you’d rather stay in your lane and let the experts do this for you, it’s best to talk to an accountant. Accountants and payroll consultants can help you work out your labour budget % and run your payroll for you year in, year out – minus the risk of errors. This will give you more time to focus on the more important aspects of your business.
Don’t forget to include your income as the business owner in the payroll and measure each employee’s productivity using an accounting software. You need to set Key Performance Indicators or KPIs each year to know where your income and expenses go. If there’s an issue, your accountant will alert and advise you on how to decrease some of your expenses.
Now all you need to do is make sure your payroll costs don’t exceed your labour budget %. You’ll have all the time in the world to improve your products, services and operations, and grow your business.
Leave your payroll with us and trust that we’ll give you all the exciting details about your business expenses! Give us a buzz and an Outside team member will be in touch!
Your Outside Team
Our Business Clients
Cam recently caught up with Grant Douglas, owner of Makers Fabrication, to get his perspective on a few things. If you want to chew the fat with Grant further – get in touch and we’ll set it up.
Besides being pretty all-round top blokes, Matt and AJ are bloody screwed on when it comes to growing their business and smashing their goals.
Flick us an email or give us a buzz!
Outside Accounting
Address: Level 2, 182 Vivian Street,
Te Aro, Wellington 6011 New Zealand
Mail: PO Box 24-457, Wellington 6142
Phone: 04 889 2975
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