“We love doing payroll!” – says no one, but your accountant.
One of the most challenging things in running a business is dealing with payroll. Payroll eats up a huge part of business expenses (and often managers time), and should be managed carefully as it can make, or break a business. To do this, you need to know the percentage of revenue that should be spent on payroll. This is called the Labour Budget %.
Payroll and Labour Budget %
Payroll isn’t just about labour costs; it also includes benefits, and bonuses. Don’t think of wages as an expense, though – 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 just need to be smack in the middle!
So, how do you calculate your payroll percentage?
You divide your total payroll by your gross revenue:
Total payroll / Gross Revenue = payroll percentage
You need to keep your labour costs / payroll percentage within your prescribed labour budget % to make sure the business keeps a portion of its revenue in its pockets in order to cover fixed and variable costs.
Labour budget % for your employees’ salaries
Look at your industry’s benchmarks, your gross revenue, and the sales number each employee brings in. 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 the average sales. You can adjust your payroll effectively at least every quarter if you monitor your labour budget %.
There’s a lot of nitty gritty involved in payroll and you can use some available calculators online to help you, but 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 can help you work out your labour budget % and run your payroll for you year in, year out – minus the risk of errors.
You should include your income as the business owner in the payroll and measure each employee’s productivity using an accounting software such as Xero, and management reporting platforms such as Futrli, or Spotlight reporting.
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 go about decreasing some of your expenses.
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
Address: Level 2, 182 Vivian Street,
Te Aro, Wellington 6011, New Zealand
Mail: PO Box 24-457, Wellington 6142
Phone: 04 889 2975