How to Calculate Small Business Payroll Percentage

Learn how to calculate, interpret, and manage your payroll costs relative to sales for better efficiency. Great payroll systems proactively manage regulatory complexity for you without the chaos. They give businesses built-in 50-state tax compliance, real-time updates, and a proven tax engine that helps you stay ahead of local and federal changes. And for companies with a global presence, the right platform helps simplify regional compliance, too—so Payroll teams aren’t managing risk on their own. One way to help achieve the right balance is to examine your payroll costs as a percentage of revenue. Analysing this ratio, called the payroll percentage, can help you optimise cost and revenue and more easily compare your labour costs to other companies.

Additionally, insightful reporting and dashboards will give you access to payroll percentage calculations, along with other key financial measures. Payroll percentage is your payroll cost as a percentage of sales revenue. A high payroll percentage may signal that you’re spending too much on payroll. It’s a useful metric to evaluate and can help guide decisions about how much to spend on payroll like when to hire new employees, raise wages or even cut back when necessary. The ratio is also sometimes called the payroll to sales percentage, payroll to revenue percentage or labour cost percentage.

Avoid Common Revenue Prediction Pitfalls

In addition to salaries, the total employee cost and percent of revenue calculation should include benefits, sick days, vacation days, insurance, and taxes. But more than that, every company needs skilled employees, the right number of employees, and happy employees. The foundation of those things is a good payroll system that rewards employees properly and keeps them happy. You will need to divide the total payroll by the gross revenue and convert this result into a percentage by multiplying it by 100. By current estimates, the retail industry aims for a percent payroll to revenue ratio. You’ll spend 10 to 20 cents on payroll for every dollar of revenue you bring in.

This function provides insights into the productivity and efficiency of a company’s workforce when it comes to generating revenue. It is a financial metric measuring the proportion of a company’s revenue allocated to employee wages and benefits. To accurately calculate payroll to revenue ratio, it’s important to understand what goes into the “payroll” side of the equation. Here’s a breakdown of the most common payroll components that factor into this metric.

How do Payroll Percentages Vary by Industry?

Analyzing historical sales data, customer churn, and average revenue per customer reveals trends and patterns you can use to project future revenue. This approach provides a realistic baseline and helps you avoid guesswork. For example, if your data shows consistent growth in a particular product line, you can incorporate that trend into your sales forecast. Supplementing this with market research and competitive analysis adds another layer of insight, allowing you to anticipate market shifts and adjust your projections accordingly. Learn more about how HubiFi can help you leverage your data for more accurate revenue forecasting.

Calculating wages as a percentage of revenue

Once you’ve calculated your payroll expense to revenue ratio, interpreting the result is just as important. Understanding this ratio can unlock valuable insights that drive better financial planning and business growth. Adjusting staffing what percentage of your business should be payroll levels is another optimization avenue, aligning the workforce with business needs and sales fluctuations. This includes utilizing seasonal hiring, balancing full-time and part-time employee ratios, or leveraging temporary staff for specific projects.

Debt Consolidation

• Nevertheless, negotiated settlements obtained on your behalf encompass the entire account, including all fees and interest.
• The payroll ratio to employees provides insights into the average labor cost for each company employee.
• Labor-intensive businesses like restaurants will naturally have higher payroll percentages than, say, a tech startup.
• They focus exclusively on consumer debt – and are not intended for business purposes.

These businesses see diminished costs in other areas, so payroll can reach as high as the 50% mark without destroying profitability. Manufacturers, however, must maintain a payroll figure closer to 30% or less, as the business must endure the cost of manufacturing the widget in addition to the payroll. The same goes for restaurants; given the high cost of food, the payroll must stay under the 30% benchmark. Unfortunately, there is no one magic payroll equation that can be applied to every business.

What is a Payroll to Revenue Ratio?

Payroll percentage is only one of the factors to consider when determining whether to raise wages. Many businesses operate with payroll percentages in the 15–30% range. But labour-intensive service-based businesses may have much higher payroll costs of up to 50%, and still remain profitable. Controlling non-wage payroll costs is also key for managing the overall percentage.

• Many businesses struggle to balance the tightrope between having enough staff to make money, but not so many that they’re wasting money.
• For example, sophisticated oil refineries and laboratories might have labor costs of less than 10 percent, while restaurants have an average around 30 percent.
• Offering benefits can help enhance employee satisfaction, morale, and retention, but increases overall payroll costs.
• Too much weight on either side might lead to a fall or a financial blow.
• Monitoring changes in the Payroll to Revenue Ratio over time can provide insights into a company’s cost management efforts.

Furthermore, this also includes other aspects, such as benefits, owner draws, and bonuses. The commonly cited general guideline is a range of 15-30% of revenue for payroll. Businesses that are labor-intensive like restaurants, hotels, theme parks, agriculture, mining, healthcare, and caregiving will usually be on the higher side of the ratio. Service-oriented businesses where payroll is the dominant factor in the business can have a percent of revenue as high as 50% and still preserve profitability. Keeping payroll costs in check is essential to managing your small business in a healthy way. But knowing what levers to pull when that precious percentage rises can be tricky.

Credit Counseling and Debt Management Plans

Consider using historical data, market trends, and sales projections to inform your revenue predictions. This provides a solid foundation for determining how much you can allocate to payroll without jeopardizing your financial stability. Accurate revenue forecasting is key to effective budget allocation.

This ratio matters because it helps gauge labor cost efficiency and profitability impact. It’s a key metric that enables HR, Sales, and Finance teams to align workforce expenses with revenue growth, ensuring headcount investments are sustainable and strategically sound. While analysing payroll percentage can be useful, it’s important not to lose sight of your broader business goals. For example, you may consider adding staff to fuel long-term growth, even if there’s a negative short-term impact on your payroll percentage.