Gross Sales vs. Percentage of Payroll
Understanding your company's financial activity involves breaking down processes into relationships between numbers. The amount that your company spends on payroll each week will come out of your company bank account. Your payroll expenditure also represents a percentage of the total revenue that your business takes in during the payroll period. The percentage of gross sales dedicated to payroll changes over time, but it should always be low enough to allow you to cover other necessary business expenses.
To calculate payroll as a percentage of gross sales, divide your payroll during a specific period by your gross payroll during that same time. Include employee benefits, employer contributions to Social Security and Medicare funds, and state unemployment insurance and industrial insurance liabilities. For example, a business spending $30,000 on payroll and related expenses during a quarter when gross revenue is $100,000 will have a payroll percentage of 30 percent.
Sustainable payroll percentages vary by industry. To find the average payroll percentage for your industry check the U.S. Bureau of Labor Statistics or Bizstats.com. A business with particularly low costs in another major expense category such as rent might be able to make ends meet with a payroll percentage that exceeds the industry average; however these averages are good starting places to determine whether your business can earn a profit with your current payroll percentage.
Your payroll cost percentage may depend on variables that you cannot always control. For example, if your company is just starting out, then you might have a hard time achieving economies of scale that enable you to lower payroll percentages. In addition, businesses may experience slow periods when they must maintain a skeleton staff simply to continue operating. Payroll percentages during slow times tend to be unsustainably high, but your business might make up for these high expenditures when sales rebound.
To improve your percentage of gross sales dedicated to payroll, your business can either increase sales and introduce efficiencies, or lower payroll by finding ways to do the same amount of work in fewer hours. Both of these approaches involve looking at the big picture and evaluating the way that payroll expense fits into operations as a whole. Lowering payroll in a way that causes you to lose sales will not improve your payroll percentage, but improving systems and maintaining sales volume will achieve this objective.