Dear M &M: Should I track my payroll as a percentage of my sales? – Jessie
Dear Jessie: Every industry has standard financial ratios. Knowing one’s payroll and being able to link it to sales volume is key to controlling expenses. Many times payroll is one of a company’s larger expenses. Everyone should know before the work week starts how much you will be paying on payroll. Understanding how much of your sales are needed just to cover payroll it key.
First one must know what your gross sales are. Gross sales are the amount of money you were paid for the goods or services you sell before any expenses are taken out. Understanding your whole payroll expense is the second part. This includes vacation pay, sick pay, insurance, Social Security taxes, workman’s compensation, Medicare taxes and any other payroll costs.
To find your payroll percentage divide your payroll expenses by your gross sales figure. A payroll of $25,000 divided by gross sales of $100,000 equals .25. Multiply by 100 to find the percentage. In this example your percentage is 25 per cent.
According to most consultants a payroll percentage between 30 to 38 per cent is acceptable. If you are paying more than 50 per cent of your sales in payroll you could be struggling frequently.
One should really find out what the standard is for your business. Price Waterhouse Cooper did a study on human capital effectiveness and found the average ratio for the manufacturing industry was 18.5 per cent, 45.5 per cent for hospitals, restaurants 25 per cent and 8.8 per cent for insurance companies. One can see the range for different industries. Find out what your industry standard is and set a goal to beat it.