Human capital most often represents the highest cost of any business. It is imperative, therefore, to maximise the value of this resource and keep costs to a minimum without compromising the wellbeing of employees. There are several ways to analyse the optimal payroll balance, but one of the most useful is to keep payroll around a certain percentage of gross revenue, utilising the principle of payroll-to-revenue ratio. So, here’s how to balance payroll costs against revenue.
Gary Epstein, MD of EasyBiz Technologies, discusses the costs and processes involved in managing payroll, and the merits of protecting the company’s most valued but most costly asset … its people.
Keeping payroll costs to a minimum is on every company’s agenda, but how do business-owners know whether they’re spending too much on it? Therefore it’s important for businesses to analyse payroll data, which is the collection of metrics that contribute to the overall business expense of paying people for work performed at the company.
There are more than just base salaries to consider. Other payroll metrics include:
- Any contractor or freelance wages outside of official payroll
- Any bonuses offered throughout the financial year
- Withheld taxes
- Benefits paid to employees
- Communication expenses that contribute to payroll
- The cost of remaining compliant with payroll regulation.
Having this information available allows businesses to accurately predict the total cost of payroll and mitigate the risk against any future payroll changes – or revenue changes. A good method of determining whether a company is paying too much is by using the payroll-to-revenue ratio principle. Determining the gross payroll-to-revenue percentage is achieved by dividing the gross revenue by the total cost of payroll and converting the result into a percentage.
For example, if a company’s gross annual revenue is R5 million and R1 million is spent on payroll for the year, the gross revenue to payroll percentage calculates as R5 000 000 ÷ R1 000 000 = 5, or 20%. Total labour costs or the percentage of gross revenues spent on payroll, can vary dramatically by industry, from 10% to as much as 80%. Generally, payroll expenses that fall between 15% and 30% of gross revenue is the safe zone for most types of businesses.
The cost of staff turnover
Reducing employee turnover is one of the most underrated ways to lower the costs of the payroll process. Losing staff brings with it numerous costs, including advertising new roles, interviewing, training, and onboarding. These additional costs can be avoided by retaining employees in their current roles, with the help of the HR team.
Consulting with HR
Working closely with the HR department will typically increase the transparency in the payroll process, which can result in lowering costs. Having full insight into where the salaries are going to (using reports and other features) is key in being able to do this.
A helping hand from technology
Payroll software manages, maintains and automates payments to employees. Efficient, integrated and properly configured payroll software can help businesses of all sizes maintain compliance with tax laws and other financial regulations, as well as reduce costs. This frees HR teams from routine tasks so that they can spend more time on planning, budgeting, and other vital business functions.
How does payroll software help businesses?
The benefits of implementing an efficient, compliant, and configurable payroll software solution go beyond the tactical tasks of paying employees. It also helps companies to:
- Improve morale. Avoid instances in which employees are paid the wrong amount, are not paid for overtime or other work, are paid late, or are not paid in their preferred way.
- Tighten security. Payroll systems help ensure that the right people have access only to the appropriate information. It’s also critical for organisations to have software in place that prevents double payments, confirms that every payment is correct, and automatically calculates the appropriate benefits and tax payments for each employee.
Payroll software is designed to automate payroll processes, improving effectiveness, accuracy and productivity. It will also enable HR professionals and business-owners to assess immediately whether the company’s payroll-to-revenue ratio is too high or whether it’s at a healthy level.
The hardest challenge with payroll data is ensuring that there’s a stream of consistent, high-value data to gather and analyse. Forecasts and predictive analysis are built by analysing a wide range of historical data over time. To do this accurately, the right technology is needed. Only then can one build a picture of payroll data and understand how it impacts the wider business and begin to make adjustments to improve the bottom line.
Choose payroll software that allows you to easily access and gain insights from your data. A good example is Quick Payroll. This software can process the payroll for up to an unlimited number of employees and allows HR to:
- Process weekly, fortnightly, and monthly pay runs with ease
- Record and manage staff leave
- Have regular software updates to cover new legislation
- Benefit from training and support
- Generate customisable payslips
- Be fully SARS compliant.
Payroll data, facilitated by technology, is key to gaining effective insights into payroll processes.
By monitoring and benchmarking this data, companies can begin to achieve the perfect balance between compensation, performance, and loyalty, and maintain the financial health of their business.