Owners of successful retail businesses must understand the significance of effective cost controls. Payroll expenses, which include employee wages, owner and management salaries, payroll tax expense and the cost of employee benefits, most often represents one of the largest and most significant business expenses. Although there is no set payroll-to-net profit ratio that retail businesses must meet, there is a safety zone that many strive to maintain.

Calculating the Ratio

Provide a basis for comparison by calculating your business’s annual payroll-to-net-profit ratio. Net profit is what a business retains after subtracting business expenses such as overhead, payroll expenses and business taxes from annual gross profits. For example, if annual gross profits total $250,000 and annual business expenses total $90,000, the next profit for the year is $160,000. Divide annual payroll expenses by annual net profit and multiply the result by 100 to reveal the payroll-to-net profit ratio for your business. If payroll expenses come to $35,000, dividing this number by a net profit of $160,000 reveals a payroll-to-net profit ratio of 21.9 percent.

Industry Averages and Statistics

The cost of labor varies among different types of retail businesses, so corresponding ratios achieved by successful businesses also will vary depending on the type of business. Factors such as industry wage averages, whether the business provides benefits and federal and tax regulations all affect specific ratios. BizStats industry ratios for a sole proprietorship range from 6.48 percent for a gas station to 27.78 percent for a general retail business. An average range for the 12 retail business listed is about 21 percent.

An Alternative Calculation

Because every retail business is different, ratios within identical types of successful retail businesses may differ. Another way of comparing ratios is to see whether the ratio for your business falls within a comfort zone of about 15 percent to 30 percent of annual gross sales revenues. For example, if payroll expenses total $35,000 and annual gross sales revenues total $200,000, payroll expenses, which consume 17.5 percent of annual sales revenues, fall well within the 15 percent to 30 percent payroll safety zone.

Reducing Payroll Expenses

The more a business spends on payroll, the less profitable it may be regardless of whether the business is considered successful. Reducing payroll expenses often can best be achieved by increasing productivity. Although productivity in a retail business can be difficult to measure, ratios such as sales-per-employee and inventory turnover rates can be helpful in assessing both individual employee productivity and the productivity of the group. Additional sales training, strict attention to scheduling and improvements in management oversight can help a retail business owner better manage and ultimately reduce payroll expenses.