What Percentage of Revenue Should be Spent on Payroll

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Perhaps among the most challenging part of handling a business is dealing with payroll and knowing the right amount of percentage that should go with it. When you deal with payroll, it is not just about the labor costs. Furthermore, this also includes other aspects, such as benefits, owner draws, and bonuses.

Payroll costs are a significant part of business expenses that should be managed with care as they can make or break a business. Part of the trick is to identify what percentage of revenue should be spent on it and how to reach this goal. The employees are the heart of a company. Different employees have different roles to play in running a company.

The sales and marketing personnel bring products to the buyers. Accounting and administration departments help ensure that the company’s internal operations run smoothly. Management steers the company towards productivity and profit. These are all different roles and people who work together as a team. It takes money to keep them happy and working. However, too much money going to payroll stretches the finances for sales and revenue. Too little budget for payroll and the company can fold at any time.

What Percentage of Revenue Should be Allotted for Payroll Expenses?

35 Percentage of Revenue Should be Allotted for Payroll

Business owners should have a percentage of about 15 to 30 percent for their payroll expenses to be on the safe side. But these percentages vary depending on the type of business and the kind of industry you are in.

Keeping a healthy payroll percentage is certainly not easy as there are many different factors to consider. There is always that thin line of maintaining a lot of employees to maximize production and sales, and the other side is not to have so many employees to save on labor costs.

Because of this dilemma, businesses need to understand that several methods are available to maintain a payroll that works around their gross revenue percentage. There is a balance that should be met between the goals of the business and its purpose.

Business expenses are unique for all types of businesses, such that a small business will have very different payroll expenses from that of a big one. The industries also dictate the percentage of costs that should go to labor.

Businesses that are labor-intensive such as theme parks, restaurants, and the like, spend about 20 percent to 40 percent on their employees’ wages. But other industries like the trucking industry can have a cost of around 60 percent or more in terms of total payroll. In comparison, an initiative that uses automation may only cost an average of 10 percent for their employees’ salaries.

On the other hand, retail businesses pay around 10 percent to 20 percent of revenue for labor. Like those that need to produce some products, service-based businesses usually have salary costs that can go up to as high as 50 percent.

Understanding why a business should control their payroll expenses is fundamental because going above 30 percent of their gross revenue can bring them down.

Factors to Consider When Determining Payroll Percentage

35 Factors to Consider When Determining Payroll Percentage3

To compute the percentages, you need to divide the gross revenue by the total payroll then convert the outcome to percent. For example, your business has an annual gross revenue of $500,000, and then you spend $100,000 for your employees’ wages. When you divide these, you will get 20 percent, and that is how much goes to your payroll expenses.

When determining the percentage for your employee’s salary, you should know the factors to consider. This includes accounting for the industry’s gross revenue, standards, and sales number that each employee brings.

Other important aspects to factor in are the benefits, taxes, sick days, insurance, vacation pay, etc. Suppose you need some help to get the proper percentage for your payroll expenses and be educated about managing these costs. In that case, payroll consultants may assist you in identifying the number percentage that should go to your employees’ salaries.

A small business may also check out some other related articles that have the same industry as them to have an idea of how similar companies spend on their employees’ salary. Once you have the number, you can put them into the cash flow pro forma spreadsheet 2021 updated version to see a data-based approach, and from there, you may get some recommendations on how to create more profit.

Also, the company owner’s income should be included in the payroll. This is so you can get a more precise overview of the finances of your business. Measuring each employee’s productivity is something that you should also look into, as this information will tell you how much one employee contributes to the company’s productivity.

One way of increasing productivity and boosting your employees’ morale is by having programs with incentives. When this is achieved, you can also expect to raise the profit of your business. Another way to increase profit is by being aware of the revenue percentage that goes to payroll.

An established HR and payroll consulting firm with vast experience in recognizing Key Performance Indicators (KPIs), tells a company owner where their business income and expenses go, you may reach out to them for advice about these things and increase your sales as well.

If an issue is detected, they can guide a business by suggesting some methods that can be implemented to decrease some expenses coming from payroll and in the same way help the company reach some balance between payroll and revenue.

Determining the percentage of gross revenue that should go to the payroll expenses is not just about assessing the costs you spend on your employees’ income, nor is it about laying off some staff when needed. But it is also about knowing that staff productivity works hand in hand with the management’s implementation of their incentives while achieving the performance standards. When this balance is met, it will lead to an increase in sales, which will work for the long term.

If you are looking at reducing your salaries and having much more sales, reach out to us Be on track to success!

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Michael Hammelburger

Michael Hammelburger

In 2019, Michael founded the Bottom Line Group, an expense reduction consulting firm helping companies reduce their expenses by thousands of dollars by focusing on areas not typically looked at by the leadership team.

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