How Much Should I Pay in Salaries and Wages?
Wages and salaries are typically one of the largest single expenses in business. When business picks up, you may find that you need employees to help you maintain your quality of service. As you add payroll expenses, how do you find the balance between paying market rates for your positions compared to managing your business expenses? The best place to start is to determine the ideal target of total payroll expenses based on your business performance. Avoid over-extending your business financially by offering salaries that your business cannot support, while making the most of the budget you have available. If you are looking for a single target number to aim for, there simply isn't one. There are, however, guidelines that you can follow to determine the best percentage for your business. The first decision you need to make is to decide if you want to base your salaries on your operating expenses or your gross revenues.
Percentage of Operating Expenses
Calculate your salaries as a percentage of operating expenses by dividing the total salary expenses by your total operating expenses. As an example, if you pay $145,000 in total operating expenses with a salary expense of $41,000, 28 percent of your operating expenses are salaries. A report by the Society for Human Resource Management indicates that retail industry businesses may have a salary to expense percentage of as little as 18 percent. Education and health care fields may have salaries that are as much as 52 percent of total expenses.
Percentage of Revenue
An alternative method of calculating salary percentages is to compare your salary expense to your company's total revenues. This percentage is established by dividing the total salaries by the total revenues. As an example, if your company's gross revenue equals $320,000 and the total salaries for the same period are $38,600, your company spends 12 percent of all monies earned on salaries. Second Wind Consultants, Inc recommends a range between 15 to 30 percent.
Track your salary percentages during each reporting period to ensure that you remain within the target range that you determined for your company's operation. Strive to keep your salaries at the lower end of the range if you need funding available to account for newly-hired employees or merit increases. As your revenues and expenses change, adapt your salary percentage accordingly. Understanding the impact that changes in your financial position can have on your operations and reporting is essential to protecting your company's financial health.
If you recognize a permanent increase in revenue, you may opt to disseminate some of the increase to your employees as raises or bonus payments. For example, if you want to issue a raise based on a revenue increase, determine the percentage increase first, then decide how much of that you want to pass along to your staff. If you recognize a 12 percent revenue increase, you could offer a 5 percent raise to your staff, allowing the business to recognize the remaining 7 percent as increased revenue.