A top-heavy payroll adversely affects profitability. Here’s how to streamline your staff and increase your bottom line.
Urban Dictionary defines the term “800-pound gorilla” as an “overbearing entity in a specific industry or sphere of activity.” Thus, it’s fitting that the term is used to describe the overbearing presence of payroll in many small business organizations. Sadly, it can put you in debt faster than you can even say “800-pound gorilla.”
In fact, we believe it’s the largest area of offense to the small business owner—the third rail, if you will, where no one wants to meddle. Often times, entrepreneurs will hire too many employees too fast; meanwhile, they fail to keep an eye on their ratios. Payroll can easily eat up 75 percent of revenue if you let it, and this just won’t work. The ratio should be somewhere in the ballpark of 30 to 40 percent of gross revenue, depending on the type of business you’re running.
- For some companies, like highly-automated production facilities, labor is a relatively small percentage of the costs involved in producing the product.
- For other labor-intensive businesses, such as restaurants and theme parks, labor costs can shoot up to 40 percent or more.
- In some fields, like the trucking industry, for instance, payroll costs can hit more than 60 percent.
Many small business owners make the mistake of getting emotionally involved with their employees.
They don’t want to let them go. It’s quite understandable, but it just doesn’t make good business sense. So, you continue to hold on, through the revenue dips and declines. Like facing the 800-pound gorilla, you don’t feel comfortable approaching it. You don’t want to upset the balance within the workplace. You don’t think you could ever let some of your workers go, perhaps because you believe they are invaluable and do a good job.
Here’s the truth: you can let them go. It’s not personal; it’s business.
Streamlining starts in the office. In many offices, there are too many middle management positions, too many staffers, and too many administrative assistants. They don’t earn, yet they incur significant overhead costs. Here’s a little secret: you can remove some of these employees, and you will be fine. If you had ten and you trim to five, those five will instinctively pick up the slack and get the work done.
It’s not a sin to ask everyone to do just a bit more work to fill in the gaps. Your workforce is like water: it will fill to fit the available space.
One of your primary responsibilities as a business owner is to decrease overhead, not increase it, points out Entrepreneur. This may not be an issue when times are good, but several outside factors can put a dent in your cash flow, such as a sluggish economy, a new competitor in your market space, or unexpected expenses such as replacing broken equipment.
You’ll need a cushion when these things happen because they will. Don’t allocate three-quarters of your revenue to pay people without whom you could be just as effective.
Use Incentive-Based Rewards
One effective solution to this issue is using incentive-based rewards. Set requirements on productivity and if your employees fulfill those, they will earn as they sell. It’s really that simple. We are firm believers that all salespeople should operate on commission: high commissions and low base pay. However, the same can go for production workers and every other worker you have that is involved in putting out a product or service.
Pay should be based on revenue. If you set requirements and stick to the 30-40% ratio, you will make money. Payroll is vast, and so are all the things associated with it, from payroll taxes and insurance to vacation and sick pay. Small businesses almost always over-employ, which drains their bottom line and ultimately puts the company at risk.
You have two choices: either your business makes money or you spend it all on payroll.
You may hate letting people go, but if the latter scenario happens, you go out of business and everyone loses. Take the time now to weed out your payroll expenses and give yourself breathing room again when payday hits. In short, excess payroll is just that: an unnecessary excess. It simply erodes profit even if your business is stable and making money.
Need a nudge in the right direction? Second Wind Consultants has the answers. Contact us today for a free consultation. We’ll help you to balance your business equation so it’s profitable.