The single biggest cost to any business is the labour cost. In fact, it averages at 70% of all expenses in a given business.
So it’s no surprise then, that over 100 hours are spent manually managing the payroll every year for every 25 employees a company has. But if you’re bleeding money, it’s not quite as easy as pay cuts and redundancies. Especially when the workload hasn’t quite decreased at the same level.
So how much should payroll actually be costing you? More importantly, how can you save on the payroll expenses ?
What Is Payroll?
The total cost of paying your workforce, including salaries, taxes, and benefits, is known as payroll. It is one of the largest recurring expenses for most businesses, so maintaining low payroll expenses while keeping high productivity or sales is a big consideration, and often a common challenge, for small businesses.
How to calculate payroll expenses?
Running payroll is the process of calculating the total earnings for employees, making the appropriate deductions, paying corresponding taxes and distributing payments. Payroll software helps automate this process.
Payroll to Revenue Ratio
So what percentage of gross revenue should be spent on payroll? The payroll to revenue ratio is a formula used by companies in order to measure the efficiency between employee costs and output (revenue). It helps to contextualise the salaries you offer within the entire income of your business.
Calculate the payroll to revenue ratio with the this formula: payroll / revenue.
For example, imagine you have 10 employees, and you spend £2,000 per salary per month. The total payroll cost is £20,000. Meanwhile, your revenue this month comes out at £100,000.
In this case, your payroll to revenue ratio = 20,000 / 100,000 = 0.20 (or 20%).
Traditionally, this metric has been used to compare cases across industries, locations, and companies. But tracking this metric over time can also give your business insight into the productivity level per employee, and overall value-for-money. Are your salaries too high for the revenue being generated? Or can you afford to give everyone a pay rise this year? This is the metric that will help you decide.
Payroll Percentage by Industry
Payroll expenses varies and there are many factors to consider. It most often depends on the size of your companies (as payroll is a cost per employee), as well as the industry your business is in. So, on average, how much does payroll cost by industry?
Luckily, there is some information out there on the general payroll to revenue ratio for each industry. Remember these payroll percentages are just guides, but they can give you something to aim for as you navigate the costs associated with payroll. For example:
Reduce your Payroll Expenses
Since it’s such a huge relative cost, reducing your payroll expenses by any small percent is no easy feat. But there are several factors to consider and a number of steps you can take in order to cut the costs associated with payroll.
Outsourced vs in-house payroll services
Outsourcing payroll means handing over the reigns to a specialist payroll company with access to professional payroll software. These are the companies responsible for paying your employees, sorting the correct taxes, and providing auto enrolment pension information, for example. Not only are they required to be legal and compliant, but fully managed payroll services mean you avoid the time consuming, intensive nature of in-house renumeration.
An in-house payroll person is relied upon to not only manage everything, but also spot money laundering or weird financial patterns that may lead to trouble. It can be an intense and high-pressure role, which is why it’s no surprise that mistakes are twice as more likely to occur in homegrown payroll solutions. Yet, more than half of the working population have experienced payroll issues at some point in their careers, which has been shown to be strong motivator to look for jobs elsewhere.
As such, tracking your payroll is important and outsourced payroll services might actually be a cost effective way to both pay your employees, and manage tax and HMRC too.
Payroll software & technology services
Mistakes in payroll can be costly, but they don’t just affect your employees. Payroll fraud costs UK companies around £12 billion per year, but forensic accountants have identified introducing a third-party payroll provider as one way to combat this. With increased security and protection, you can place more reliance on your payroll software.
Outsource your payroll data to a cloud-based payroll processing company in order to beat the scammers. Payroll costs are reduced and you can have higher confidence in the accuracy of time-keeping, tracking and more.
Plus, when you automate or use online payroll services, you reduce risk within compliance. Manual time-keeping exposes your staff to issues with taking breaks, working overtime or clocking in too early or too late. However, automatic payroll companies manage this without issue.
While the average small business will end up paying around $30,000 in back pay, the costs to mitigate damages when these issues are NOT caught could be three times as much.
Reduce employee turnover
Reducing employee turnover is one of the most underrated ways to lower the costs of the payroll process. Attrition brings with it numerous costs, including advertising new roles, interviewing, training, and onboarding. These additional costs can be avoided by retaining your employees in their current roles, with the help of your HR team.
There are even more steps you can take with regards to your workforce in order to reduce attrition, and thereby payroll costs, for example:
- shorter shifts
- optimising working hours
- more part-time / flexible hours for employees
Work with HR
Working closely with your HR department will typically to increase the transparency in your payroll process, which you can expect to lower costs. Having a full insight into where the salaries are going to (through the use of reports and other features) is key in being able to do this.
It can lead to frequent pay rises for those who excel, and prompt checks on those who are not working as efficiently as others. This way, your payroll costs are more intentional and and can be reviewed on a monthly basis, or at year end.
No matter what your industry, payroll management is important in order to save on unnecessary expenses.
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