What Percent of Business Overhead Should Be Payroll?
What percent of your business overhead should be spent on payroll depends on your type of business. Even within type, there is no single answer that suits every situation. To get the best advice for your business, talk to other entrepreneurs who have already been through the startup process and can give you experience-based advice on payroll and other issues.
Other People Are Reading
-
Sales Business
-
If your business sells products, Don Todrin of Second Wind Consultants, Inc. recommends that payroll comprise about 15 to 30 percent of your operational costs. Hiring and retaining an efficient and effective workforce is key to moving your products. However, some of your overhead is also spent on creating or obtaining those products to sell, which you must take into consideration. Exact numbers will differ by business, but aiming for this range should help your other numbers more readily fall into place.
Service Business
-
When you run a service business, you don’t have the added cost of manufacturing or obtaining saleable products to worry about. Instead, service is what you sell -- whether you run a housecleaning, errand or other type of service. Therefore, you can afford to spend a little more on payroll -- up to 50 percent, according to Don Todrin. A lower number is better, particularly if your other numbers show that your business is profitable and your clients are happy. Don’t be afraid to hire more and better employees to keep your clients happy. Clients of a service business who aren’t happy won’t come back. As a service business, you rely on repeat customers and word of mouth even more directly than as a sales business. Keeping your business profitable is worth spending a little more on payroll if necessary.
-
Considerations
-
Chances are good, If you’re just starting your business, that you’re very concerned with getting the numbers exactly right. Every business is a little different, and exact numbers are difficult to come by. If you don’t have a local experienced small business mentor in mind, contact an organization like the SCORE Association that specializes in giving free advice to entrepreneurs. People who volunteer through SCORE have successfully opened and run businesses of their own and are looking to give back to the community. Take advantage of a wealth of experiential knowledge to create a more well-informed business plan.
Warning
-
In the beginning stages of a business, before you’ve broken even, you may be tempted not to count your own salary as part of payroll or to only pay yourself enough to get by. However, for your business to be successful, you need to keep the numbers as honest as possible from the start. You need to present yourself with a clear picture of exactly what your business is spending for each portion of overhead. If you work with misleading numbers, you can’t effectively analyze them to find ways to maximize your profits. If you think you will start paying yourself what you’re actually worth once your company breaks even, you’ll shift your company’s books from black to red, and your percentage of overhead spent on payroll will go up.
-
References
Resources
- Photo Credit Medioimages/Photodisc/Photodisc/Getty Images
