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How to Keep Your Payroll From Consuming All of Your Profit

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    Over the past few weeks we’ve looked at all the things related to paying your employees, including direct deposit, payroll frequency, and setting salaries. Now we’re going to look at the big picture concerning payroll and consider how to prevent labor costs from eating up all of your profit.

    Managing labor costs can generate a lot of stress for a business owner. Consider a restaurant and two equally bad Saturday night scenarios. You planned to be slammed. You’re paying seven servers, a bartender, four cooks, and a hostess to stand around while you cross your fingers that customers will show up. There are few things worse than paying people while you’re not making a dime. But consider the alternative. You have a long list of people waiting to be seated and scheduled only a handful of servers who are trying to be ten places at once. Your customers are ypset and your kitchen is struggling to keep up. How do you find that sweet spot between planning and not breaking the bank?

    Adequate staffing is only one factor when managing payroll expenses. Getting a handle on your labor costs can mean less stress and more money to invest in your business. Let’s look at some ways you can tame this budget item.

    Know your payroll costs

    The simplest way to calculate your labor costs is to take your total gross revenue and divide it by your total payroll, including benefits.

    Total Gross Revenue

    Total Payroll (Salaries + Benefits)

    =Labor Costs

    (Helpful tip: A payroll provider can offer software that provides detailed information about labor costs by job, department, division, location, and task—which makes keeping track of your labor costs easier.)

    Regardless of what type of business you have, payroll generally eats up the largest percentage of your revenue.

    There’s no magic number for the percentage of your revenue that should go to wages, benefits,  and payroll, however keeping labor costs under control begins with knowing where each dollar is going. You can also see if you’re becoming more efficient as these ratios change over time.

    Smarter scheduling

    Consider the restaurant scenario. Time and attendance software makes it easier to schedule, monitor attendance, and compare schedules versus time worked for your employees. This information helps you better manage your scheduling in the future.

    Revisit your salary structure

    The Society for Human Resource Management recommends reviewing your salary structure every three to five years, but if your budget is out of balance there’s no time like the present. Maybe you’ve been leading the market in compensation but you aren’t in an industry where you need to do this. It might be better to scale back and match the industry instead. See our post for more guidance on setting salaries.

    Get creative with staffing

    One of the best ways to fill staffing gaps is cross-training employees on different jobs so you can easily shift your labor around if someone is absent or on extended leave.

    It’s also good to ask yourself anytime you have a staff vacancy whether this position requires a full-time employee. Is there someone on your team who is knocking it out of the park? Giving him some extra responsibility (and a raise!) may save you from having to rehire another staff person.

    Retain your talent

    It’s a lot cheaper to keep good employes than hire new ones. Proper onboarding and employee engagement are critical in reducing employee turnover.


    Enlisting the help of a third party can take work off of your employee’s plate and allow her to focus on more critical tasks that can impact your organization’s bottom line. (We happen to think accounting and payroll are great functions to outsource!)

    In Your Corner

    Managing your payroll and HCM within a paperless platform means you have easy access to accurate payroll data. In fact, clients who use our iSolved platform have access to reports on labor costs and time attendance. We love working with clients to manage your payroll more efficiently—and maximize your profit!

    Download the Free Guide


    Take The Pain Out Of HR Tasks