How Your Payroll System Affects Your Balance Sheet

How Your Payroll System Affects Your Balance Sheet

The balance sheet is to small business what an inspection sheet is to a car mechanic. It provides a quick snapshot of how the business is doing based on summaries of assets, liabilities, revenues, and profits. Smart business owners know that nearly every aspect of what they do affects the balance sheet in some way. That includes the company payroll system.

Balance sheets are typically divided into numerous categories to make it easy to digest. At the top are assets and liabilities. Under assets, the balance sheet might list both short-term and fixed assets. Accounts payable, monthly debt service, and payroll are common liabilities.

What must be understood is that a company's payroll system affects the balance sheet in ways that may not be well represented with raw numbers. In other words, payroll is about more than just paying workers for their weekly hours. Payroll must also consider:

  • taxes and workers comp insurance
  • health insurance and other benefits
  • holiday and sick pay
  • non-standard pay (performance bonuses, incentive awards, etc.).


Total Spend Includes Cost of Administration

It is easy enough to understand how the four items listed above affect the balance sheet. All a company's workers will earn a certain amount of pay during each cycle. It is easy to chart how much is being withheld and paid in taxes, as well as how much you are spending on benefits and extra pay. Still, it doesn't stop there.

The cost of administration is the one aspect of a company's payroll system that does not show up as a raw number on the balance sheet. It still affects the balance sheet, however.

First and foremost, the company that does payroll in-house must have workers capable of doing the job. That involves salary and benefits. Then, those workers will need the tools to complete the tasks. That usually means hardware and software. Finally comes the added cost of filing state and federal paperwork. This generally requires working with an accountant who only adds further to the cost of payroll.


Know Your Total Spend on Payroll

Small businesses with very simple balance sheets may never really stop to consider how much their total spend on payroll is. This is a mistake. Why? Because the number one rule of business is to spend as little as possible in order to achieve maximum earning potential. Certainly, a business owner wants to spend whatever is necessary to do payroll right; but why spend more?

Spending more than you must on payroll admin is no different than purchasing the most expensive health insurance policy simply because you can. It may be necessary to spend, but there is no way for a company to know if too much is being spent unless management knows the total cost of payroll.