What Percentage of Gross Receipts Should Be Payroll?

An efficient company controls its payroll expense by maximizing emplpyee roduction.

There is no magic number or formula regarding how large or small a company's payroll should be relative to its gross receipts. The size of a company's payroll depends on several factors, including size of the company, the industry and management decisions. For example, software companies have little overhead costs in terms of payroll compared with a car manufacturer, yet both have control over the size of their respective payrolls.

Gross Receipts

Gross receipts, or sales, is the amount of money a company earns before paying its fixed and variable expenses. Higher sales don't necessarily translate into higher net income, nor do lower sales mean less profit. Tying payroll expense to sales is one metric; however, companies may choose other metrics to gauge profitability.

Payroll Expense

A company's payroll may comprise a large portion of its operating expenses, particularly for a large company or one in a capital-intensive industry. Many small-business owners stop short of calculating true payroll expenses because they fail to include as part of employee wages vacation pay, sick pay, health insurance, retirement plans and employment taxes.

Payroll Percentage

Divide your payroll by your sales to obtain your payroll percentage. For instance, if total sales for the period are $217,000 and your payroll over that time is $87,300, the payroll percentage is 40.2 percent. According to Second Wind Consultants, an acceptable payroll percentage is 30 percent to 38 percent. According to the company, having a payroll percentage of more than 50 percent spells trouble for the company.

Insight

The key to managing your payroll expense is operating at peak efficiency. Your sales should justify maintaining or increasing your payroll expense. In other words, operating at peak efficiency allows you to gauge whether you need to adjust your payroll level. Tying your payroll expense to sales allows you to establish a desirable percentage payroll level but is only one metric for identifying operating efficiency.

References

• Knowledge At Wharton: Out of Stock? Might Be Your Employee Payroll -- Not Your Supply Chain -- That's to Blame
• Second Wind Consultants; What Percent of Your Revenue Should Be Allocated to Payroll?; Don Todrin; December 2008
• Payroll Services For Small Business: Small Business - The Dream of Thousands