As your Small Business grows, one of the biggest decisions you will face is how to determine what amount of your revenue should be set aside for future growth and how much of that revenue should be paid to your current or future employees.
This is a difficult decision as you will need funds and talent to ensure your business grows and continues to thrive. In this post, we will examine how much revenue should be funneled into payroll and how to reach a balance between the two.
1. Know Your Entire Payroll: Step 1 is know your payroll in its entirety. This should include not just salaries but the entire payment package you offer like paid vacation time, part time or freelance hires, insurance and any other benefits you incur as the Small Business Owner.
2. Do the Math: The second step is to ensure that your revenue exceeds your payroll and other operating expenses by a good margin. Determine your monthly expenditure in terms of rent, utilities, employees, machinery, maintenance etc and ensure that your current revenue exceeds that amount.
It is also important that you chart the future expenses of your company, keep an amount for unseen expenditure so you can determine the exact figure required for growth and expansion.
3. Find Your Labor Margin: Your Business will have a minimum number of employees required to function properly but often you need to take into account that there will be times when all your employees are not available. Due to unaccountable factors like sickness, travel or an employee leaving suddenly you will need to employee more people than is necessary so that your Small Business has the labor margin to handle these situations and circumstances.
4. Find Out The Industry Standards: Depending on the industry you are in, the balance you strike between revenue and payroll will differ. In manufacturing, a bulk of your expenses will be directed to raw materials and production but in the services industry your operational costs could be significantly less. The key is to ensure that you are not over spending on your workforce and you have enough resources to grow your business, no matter how many people you may choose to employ.
5. Create a Percentage Based Payout: Salaries are one of the key determinants that attract and keep good talent at your organization. While you can plan your revenue, you may have only an estimate of your earnings. You can therefore create a variable payment model where you can incentivize your employee performance by offering them a variable bonus based on revenues in the quarter.
Follow these simple guidelines and you will be able the right balance between payrolls and revenue for your business. What you save will determine the long run growth of your business and what you payout will influence the stability, quality and consistency of your workforce.