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It’s no secret that accounting is based on numbers and calculations. But did you know that accountants have their own metrics like mathematicians do, too? One of our metrics is called payroll to revenue ratio, and it works out a business’s productivity level rather than monetary amounts alone. Read on to find out what payroll to revenue ratio is, and whether you’d benefit from knowing your own.
What is payroll to revenue ratio?
Payroll to revenue ratio is an accountancy metric that measures how well a business utilises employees to generate revenue. Business owners or HR managers often use this metric, alongside others, to see whether the business is understaffed, overstaffed, or just right – and the effect it is having on the profits.
How to calculate payroll to revenue ratio
The sum used to calculate payroll to revenue ratio is easy:
ƒ Sum(Labour Costs) / Sum(Net Sales)
However, there is a step you need to take before and one afterward.
- First, you need to identify how much is spent on your employee payroll. You also need to know your net sales.
- Next, use those two figures with the sum provided.
- Your final step is to see whether your payroll to revenue ratio needs improving, and the actions you can take to increase your business productivity.
Payroll to revenue ratio by industry
What constitutes a `good` payroll to revenue depends on your industry, but the umbrella ballpark is 15%-30%.
The insurance industry hires lots of employees to sell high-value products at a low wage; insurance companies have a low payroll to revenue ratio (around 9%). On the other end of the scale is the medical industry, with most hospitals sitting at 45%. Typically, hospitals hire specialists to work under the NHS, which, is of course, is publicly funded healthcare.
Entrust a chartered accountant to discover your payroll to revenue ratio
Are you interested in discovering exactly how productive your business is – by having a chartered accountant calculate your payroll to revenue ratio and other practical figures? Get in touch with Harris Lacey and Swain to find out more.
