One of the most challenging things of running a business is dealing with payroll and its corresponding percentage. Payroll isn’t just about labour costs; it also includes benefits, bonuses, and owner drawings. Payroll eats up a huge part of the business expenses, so it 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 called Labour Budget %.
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 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 a too many employees to maximise sales and production and not having enough employees to save on labour costs – you just need to be smack in the middle!
Gross revenue / total payroll = payroll expenses
If you want to know what percentage to use for your employee’s salary, you need to know your industry’s best practice, 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. Accountants and payroll consultants can help you work out the percentage that should go to your employee salaries.
Make sure your payroll costs don’t exceed your target percentage of sales. 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 target percentage of sales. You will also find out if your business is still making money after wages.
You should include the business owner’s income in the payroll and measure each employee’s productivity using accounting software. You need to set Key Performance Indicators or KPIs each year to know where your income and expenses go. If you detect an issue, your accountant will advice you on how to decrease some of your expenses.
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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