Keeping payroll expenses under control often means walking a fine line between having enough, but not too many employees. Understanding this and maintaining a good balance are often two different things. Although there are several ways to decide what constitutes a good balance, one of the most useful is keeping payroll at or close to general recommendations or typical percentages for your industry.

Payroll expenses for a small business or private corporation include your salary or draw, management salaries, hourly wages, payroll taxes and employee benefits expenses. Just as labor costs differ by industry, so do typical percentages within different businesses. Factors such as the industry wage average, federal and state income tax regulations, and the amount and type of employee benefits all play a role in determining what’s typical, either in general or for businesses within your industry. Regardless of the industry, most analyses determine this using a labor-costs-as-a-percentage-of-revenue ratio.

Calculate a Revenue Ratio

Input requirements for a labor-costs-as-a-percentage-of-revenue ratio include annual gross sales revenues and annual payroll expenses. Gross sales revenues are sales revenues not adjusted for discounts or returns, operating expenses, cost of goods sold, or sales tax payable. The formula for calculating a labor-costs-as-a-percentage-of-revenue ratio is: annual payroll expenses divided by gross sales revenue, times 100. For example, if annual payroll expenses for your business are \$55,000 and sales revenues are \$300,000, your labor-costs-as-a-percentage-of-revenue ratio is 18.33 percent, or 55,000 divided by 300,000, multiplied by 100 .

Revenue Ratio Analysis

One way to analyze ratio results is to compare your ratio to an industry average. For example, according to information in the PriceWaterhouseCooper 2012/2013 US Human Capital Effectiveness Report, the average ratio for the manufacturing industry as of 2011 was 18.5 percent, 45.5 percent for hospitals, and 8.8 percent for insurance companies. Another way is to see whether the ratio for your business falls within a general recommendation -- or comfort zone -- of 15 percent to 30 percent of annual gross sales revenues.

Managing Payroll Expenses

Managing benefits expenses -- especially insurance costs -- and improving employee productivity are among the best ways to manage reduce overall payroll expenses. Implementing a wellness program is a cost-effective solution to improving the health of your employees. Wellness programs often provide additional benefits, such as increased productivity and employee morale, and decreasing absence and employee turnover rates. Productivity ratios such as sales-per-employee and inventory turnover rates are useful for evaluating individual and overall productivity. Business rules requiring managers to monitor employee scheduling and overtime authorizations are also helpful in managing payroll expenses.