Does Your Payroll Fit Your Business?
In this issue ....
Right sizing your payroll
273 words, a 2 minute read.
Your biggest investment in the business is your people. Yes, you buy lots of products to sell but mostly that’s a pass thru. Payroll is a standing cost that’s hard to regulate in most Ci companies. Unlike products which you can purchase for specific projects, payroll and employees don’t flex in the same way.
So how much payroll is good or even great?
As a rule, we think 30% of revenue is close to ideal.
However, it is directly related to the margin $$ you create or in percentages (If your margin before labor costs is 65% then 35% payroll is good!)
The relationship between margin and payroll load cannot be understated.
If your payroll % is too high; look to increase prices or add labor hours. If you can't, reduce head count or get more production out of your people.
If your spread is too low and your payroll percentage is below 30%, you have a pricing issue.
A couple other measures to note: paying less than 7% for sales payroll is a must. Many companies benefit because the owner is a rainmaker too, so sales payroll can be much lower.
How much should your tech team cost you? 15% to 18% is a good target for tech payroll.
To keep this all in-perspective, owner pay should be at replacement cost (usually 3% or less if revenue over $3M) under $3M owner pay can be $75k to $90k typically. Of course, bonus to owners and owner distributions are below the line.
Payroll says a lot about your business. Hope you can make your payroll fit your business; it might be the single most important element of making money in this business.