What Percentage of Revenue Should be Spent on Payroll?

28th March 2017

deciding how much revenue should be spent on payroll

Many businesses struggle to balance the tightrope between having enough staff to make money, but not so many that they’re wasting money. Calculating what percentage of business income should go to wages is vital for keeping business afloat and not drowning in their own overheads.

If the amount is too large, you risk running out of money for other expenses. If it’s too small, you risk losing loyal employees to competitors. Payroll is a regularly occurring expense that will never stop. It comes every month like clockwork but can vary widely each time due to sickness, holiday, expenses and benefits. For businesses trying to keep their balance, payroll can cause some serious headaches. If you’re looking to save, you can’t just lower payroll because this will have knock-on effects with staff and productivity. You need an informed strategy and calculated approach.

Calculating wages as a percentage of revenue

The ideal percentage between payroll and revenue is hard to pin down. It can vary widely between industries and the size of your business. Some businesses also include recruitment and training within the total staff bill.

Let’s take fast-food restaurants as an easy-on-the-surface example. As a general rule, they offer low wages. So you’d think that the salaries as a percentage of revenue would be massively in favour of revenue since so little is going out the door in wages.

However, fast food restaurants also experience very high staff turnover. The upshot of this is that they have to spend more money and time than other industries on recruitment and training, so if this is included, the percentage begins to increase in favour of payroll.

It isn’t just wages and recruitment that need to be considered. Other elements that increase the cost of payroll include;

  • Staff benefits
  • Expenses
  • Internal compliance changes such as auto-enrolment
  • The cost of running a payroll department

Whether for your business a payroll department involves one member of staff dedicating time from other duties to do the payroll, hiring a whole department or payroll outsourcing, payroll is a cost in itself.

Once you have figured out your overall payroll expenses, you can divide it by your gross income to produce a percentage of payroll to revenue.

How to calculate how much you’re spending on payroll

To determine the amount paid for payroll as a percentage of operating expenses, simply add up all the operating expenses in your company, including research and development, supplies and equipment, and general and administrative costs. Then add up all the salaries in the organisation, including:

  • Gross wages
  • Paid annual leave
  • Pension contributions
  • Other benefits
  • Statutory payments
  • Employment Tax & National Insurance

Divide the salary figure by the operating expenses, multiply by 100, and that’s the percentage of revenue you’re currently spending on payroll.

Average business overhead percentage

Calculating payroll overhead costs varies from industry to industry, but here are the broad strokes:

Service businesses, such as consultancies, make payroll the major cost of providing the service. Experts need paying and through their efforts, revenue is generated. These businesses can take on higher payroll percentages since the payroll is, technically, producing revenue. There is likely to be no other significant costs in providing such services, so payroll can reach the 50% mark without destroying profitability.

Wages as a percentage of turnover for manufacturers, however, must be closer to 30% or less. This is the business must endure the cost of manufacturing products plus allocating payroll. This is the same with restaurants. Given the high cost of food, payroll must stay under 30%. These are, of course, the general guidelines. As mentioned already, there are many factors to consider and every business is unique.

Average payroll cost per payslip

A study by the Australian Payroll Association in 2019, revealed the average cost of payroll per payslip, depending on the size of your business. How does yours compare?

< 50 employees£119.47
50-199 employees£34.57
200-499 employees£10.54
500-1,999 employees£6.77
2,000-9,999 employees£4.07
10,000+ employees£2.65

 

As you can see, larger businesses benefit from lower average costs, thanks to automation. But with that saving comes complexity, which has a cost of its own.

How to reduce payroll costs

  • Increase sales
  • Reduce the number of full-time employees
  • Schedule shorter shifts
  • Streamline payroll processing

Managing benefits expenses and improving employee productivity are among the best ways to manage reduce overall payroll expenses. When payroll is a percentage of your revenue, boosting your revenue is the obvious choice to help alleviate the cost.

However, there are other things you can do, such as optimising your teams, work schedules and processes. Even small changes can lead to big savings in the long term.

Another option is to outsource your payroll. Outsourcing payroll can create huge savings for small businesses as it removes a huge overhead cost. For larger businesses, the expertise of payroll professionals can streamline complex payrolls and make acquisitions and expansion much more manageable.

The cost savings of payroll outsourcing are proving highly beneficial. In the current economic climate, businesses are looking for more ways to keep costs down, improve their efficiency, and gain a competitive advantage. Understand more about payroll outsourcing with our guide.

 

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