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What Percentage of Revenue Should Be Spent on Payroll?

Getting payroll right or wrong can make or break your business.

You can keep your team happy and your store fully staffed and profitable if you manage it well. Get it wrong, and you face disgruntled workers and maybe even fines and penalties. Your employees depend on their paychecks coming on time so they can pay their bills.

Making sure your employees are paid is important, but you also need to make a profit and nail your cash flow management!

Imagine standing on a balance beam. On one side, you have your team’s wages, which are crucial to keeping them motivated and committed. On the other side, you have your store’s overall revenue. 

Too much weight on either side might lead to a fall or a financial blow. Maintaining the right balance is vital to staying upright and, in your case, running your store smoothly.

This article will discuss how much of your revenue you should spend on payroll. We’ll explore industry standards, the role of technology and accounting tools in payroll management, and how factors like business size, location, and seasonality can influence your payroll budget.

Retail POS System Buyers Guide

What Percentage of Revenue Should Be Spent on Payroll? It Depends

There’s no universal answer to this question. But one thing is certain: Payroll budgeting is essential to your retail store. Without staff, you can’t run a well-oiled machine. Your payroll budget should guide financial decisions and ensure your team is adequately compensated.

Having a flexible payroll budget is vital. 

Consider seasonality. During the holiday rush or even if you’re having a big sale, you’ll need extra staff to manage your store and help customers. Your payroll expenses will likely spike. During slower periods, your payroll costs may drop. A flexible payroll budget makes sense for retail stores.

Related Read: What Is the Difference Between Payroll and Income Taxes?

Your employees are the heart of your retail operations, especially during the holiday season and big sales. Their satisfaction likely starts with being paid accurately and on time. It’s essential to fairly compensate employees to create a positive work environment and boost morale.

When your employees are happy, they’re more likely to greet customers with a smile and go the extra mile to help. In the long run, investing in your employees through a well-managed payroll can be one of your most valuable business strategies.

A Closer Look at Revenue and Payroll

You’ll primarily generate revenue through sales of goods and services to consumers. Every item you sell and service you render contributes to your revenue. But the process of getting products into the hands of your customers incurs various costs.

From procurement and staffing to marketing and overhead costs, you’ll need to strike a balance between costs and revenue. Your cost to revenue ratio is a crucial metric to help manage payroll costs. This ratio compares your operating expenses (including payroll) to your total revenue and gives an overview of your store’s financial health.

Your revenue must be healthy to pay your staff well, and to even consider hiring more staff. It fuels all of your business operations. It affects your ability to invest in inventory, cover business expenses, expand operations, and, most importantly, cover payroll.

A Breakdown of Payroll Costs

To get a handle on your payroll expenses, consider your entire operation. Look beyond the base salaries and hourly wages of employees.

Related Read: What Is the Difference Between a W-4 and W-2?

  • Wages and salaries: The most prominent part of your payroll expenses are the wages and salaries of your employees. This includes floor managers, cashiers, sales associates, stock clerks, and administrative staff.
  • Overtime pay: Retail often involves irregular hours and extended shifts, typically during peak shopping seasons.
  • Bonuses: You might offer performance bonuses or commissions to motivate your employees. While this won’t be a regular expense, your payroll budget must account for it.
  • Benefits: Will you offer health insurance, retirement contributions, paid time off, and other employee benefits? Factor in workers’ compensation insurance, too. Accidents can happen in any work environment.
  • Payroll taxes: As an employer, you’re responsible for certain payroll taxes. In addition to federal and state unemployment taxes (FUTA and SUTA), your store may be subject to state and local taxes.
  • Training costs: Training new employees and providing ongoing training to your current staff should be budgeted for. Consider training materials, courses, and wages paid to employees while training.

What Is the Ideal Payroll to Revenue Ratio?

By current estimates, the retail industry aims for a 10-20 percent payroll to revenue ratio. You’ll spend 10 to 20 cents on payroll for every dollar of revenue you bring in. The exact percentage varies based on a variety of factors.

You’ve got to consider your unique business needs. High-end boutiques focusing on personalized customer service might have a higher ratio than self-service discount stores.

The size and scale of your store also make a difference. 

A small convenience store with a lean team will spend significantly less than a large grocery store with multiple departments and a larger workforce. However, the smaller store might require more skilled (and higher-paid) staff to manage multiple responsibilities.

Location plays a role, too. Your payroll to revenue ratio might increase if your store is located in an area with a high cost of living.

Lastly, consider seasonality again. To handle the increased workload during peak times, like the holiday season, you might need to hire additional staff or pay overtime to existing employees. Your payroll to revenue ratio may temporarily increase as a result.

Strategies for Effective Retail Payroll Management

Running a successful retail store requires effective payroll management. A few strategic practices can simplify your payroll process, reduce errors, and ensure accurate and timely employee payments. Here are some strategies to consider:

  • Streamline your payroll process: In-house payroll can be effective for small stores, but running payroll takes up precious time you could spend elsewhere. You’ll need to think about payroll schedules, tax compliance, and running an error-free process. Or, you could outsource payroll to experts who help reduce the risk of errors that could lead to fines, penalties, and disgruntled employees.
  • Embrace technology: If outsourcing isn’t an option and you want to handle it in-house, rely on technology. Modern payroll software simplifies calculating wages, deductions, and direct deposits, significantly reducing manual labor and errors.

Related Read: 9 Apps All Small Business Retailers Should Be Using

  • Shop around: Providing benefits is a great way to attract and retain talent. But as it’s a payroll expense, shop around to find the best package for your store. In the long run, comparing options can help your business save money since different providers offer different prices.

Use Your Point of Sale (POS) System

Modern point of sale (POS) systems help manage payroll effectively. They do more than just process transactions. Through integrations with payroll systems, you can collect sales data and import hours worked, helping to streamline the process.

Advanced POS systems come with built-in time-tracking features. Your employees can clock in and clock out, and your POS provides an accurate record of hours worked and can automatically calculate overtime, eliminating the need for manual tracking.

If you do offer sales commissions, you can track individual sales performance and calculate commissions accordingly. This will save you a lot of time and reduce the possibility of errors.

Lastly, your POS system can help with labor forecasting. With the help of historical sales and trend analysis, your POS can help you predict busy and quiet periods so you can schedule your staff more effectively and maintain an optimal payroll to revenue ratio.

Retail POS System Buyers Guide

Answered: What Percentage of Revenue Should Be Spent on Payroll?

Your revenue to payroll ratio depends on your business’ needs. 

There are industry standards, but location, store size, and how you run your business affect the percentage. Automating payroll and getting advice on workers’ compensation and other benefits packages can save money in the long run (or immediately if you’ve been overpaying!).

A robust POS system is an excellent tool for managing your payroll needs. From sales data to labor forecasting, a cloud-based POS system lets you take control of your business from anywhere.

At POS Nation, we work with thousands of retailers to help them manage every aspect of their store operations. Schedule a demo today if you want to see how we can help your store!


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