We are now into the third quarter of the calendar year, and companies are beginning to look at getting things wrapped up in early January so as to close out accounting for 2016. As part of their year-end review, business managers will be looking at all of their expenses as compared to revenues and profits. Where they can cut, they likely will do so. In light of that, we wonder how many small businesses will take a serious look at payroll as an operating expense that can be adjusted in order to improve company performance.
Payroll is just as important as any other operating expense. It also happens to be the largest expense most businesses incur. The reality is that business requires labor and labor requires pay. So how is a business performing in relation to its payroll? In other words, is the amount of money being put into payroll equal to the value staff members are producing? This is an important question businesses have to look at whenever they are considering key performance indicators that affect future profits.
Pro-Sports Offers a Great Illustration
Pro sports, as a business, provides an excellent illustration of how to view company payroll as an operating expense that can be used to improve performance. We'll talk about Major League Baseball now that the regular season is over. Specifically, we will discuss the Tampa Bay Rays.
According to the Tampa Bay Times' Marc Topkin, the Rays ended the season with a $68 million payroll. Just over $23 million is slated to go to a single player next season. Topkin sees a problem with that given the fact that the Rays' total payroll is not expected to eclipse the $70 million mark for 2017.
The difficulty the Rays are running into is that they are not getting the kind of production they want for the amount of money they are spending. So Topkin says it's time to increase the value of their current payroll. He suggests it is time to trade away a few of the players with higher salaries and low production numbers in favor of new players capable of producing at the same amount of money or less. It makes perfect sense.
In the world of small business, things are similar. Small businesses are obviously not dealing with multi-million dollar salaries like pro sports does, but a company still needs to get the right kind of value for the amount of money they put into paying labor. This is the reason behind annual assessments.
Improving Performance, Not Payroll
The idea behind looking at payroll as an operating expense is to improve performance without necessarily increasing the amount of money being spent on payroll. Companies need access to accurate data in order to make a proper assessment. That can be accomplished by using paid or free payroll software for small business, whether it is purchased off-the-shelf or provided by a third-party payroll company.
With a good software package, companies can determine just how much they are paying in salary, bonuses, benefits, etc. They can then decide whether their total payroll is commensurate with the output being produced or not. If not, things might have to change to some degree.
Whether a company handles its own payroll or contracts out with a third-party provider, payroll data should be used to improve company performance. Otherwise, companies may continue paying staff without any regard to production or output. Some will even lose out to the competition because they are failing to use what is considered the primary operating expense to their own advantage.
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