Payroll - Managing Your Biggest Expense


When 16-year-old Rosalinda Ahuatzi started her own nutritional shake business in Lexington, Kentucky, within months she had to hire an employee to operate the shop while she attended her high school classes. Now 17, this busy young entrepreneur is hoping to generate enough cash flow to hire another employee as she eyes opening more of her ProShakes Nutrition locations.

ProShakes Nutrition

Rosalinda is experiencing what all growing businesses face – the need to boost cash flow to keep up with the demands of growth. For most businesses (with rare exceptions), payroll is the biggest expense.

A few basic principles about payroll:

It’s one of the main areas where management can control operating expenses in most businesses.


By closely managing payroll at optimum levels, you can boost your bottom line profit dollars.


Failing to manage payroll costs properly usually results in an extremely negative effect on profitability.

Many small business owners don’t fully understand the financial dynamics of staffing. They look at a position in terms of how much they have to pay in salary or an hourly rate. Yet in almost every single case the full cost is another 30 to 50 percent above that.

These less obvious “hidden” costs include:
  • Employer payroll taxes
  • Workers’ comp insurance
  • Health and other group insurance
  • Vacation and sick leave
  • 401(k) or other retirement plans
  • Training
  • Operational costs such as uniforms, tools, equipment, computers and other supplies.

There are several areas that can be negatively affected by poor staff management.

Your company’s history regarding employment activity can have a dramatic effect on the unemployment tax rates you pay. In Texas, for instance, the rates can range anywhere from 2 to 8 percent of the first $9,000 in base compensation.

If your company has a history of on the job injuries, your workers’ comp premiums can go through the roof for extended periods – it can take up to three years to correct even one year of bad experience.

And if your turnover is high, the training requirements and stress on the overall organization can be extreme.

Some costs are fairly consistent, while others can be wildcards. For instance, healthcare costs continue to rise year after year, and there is a mind-boggling array of retirement plan options available, if you choose to offer them.

Employer retirement plan options

Your company’s specific circumstances will vary, so it’s crucial to find a competent professional to guide you through the maze of group benefits and help you design a plan that fits your company. Even with expert help, you must stay involved in the details. Don’t leave these decisions to anyone who does not understand the dynamics of your company and who does not have a vested interest in its long-term success.

Bottom line:

Make sure you know and fully understand your cost structure, especially when it comes to making operating decisions or bidding/quoting new business. Otherwise, you could be in for some very big and unhappy surprises.

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