GPI 065 – Financial statistic – calculate payroll (direct and total) as % of net sales.

Chart and track payroll as a percentage of net revenue:  You want payroll as a percentage of net sales to drop, not increase.  You want to generate more sales per payroll dollar if possible.  Track this monthly and see if your firm is more efficient or worsening.

To do this calculation, add all of your payroll costs on your profit and loss statement (P&L).  This includes everyone’s salary and benefits (i.e.  vacation expense, holiday expense, jury duty, overtime premium, overtime straight, workman’s’ compensation insurance, social security, FUTA, SUTA, etc.).

Divide this total payroll and benefits by the net revenue (net sales) each month.  Is the labor cost percentage declining or rising?

Example: 

Total Payroll = $ 650,000, Net Revenue = $3,000,000, PR % of Net Sales = $650,000/$3,000,000 = 21.67%.  This might not be bad unless it was 20% last year and 18% the previous year.  With this type of worsening trend, any of the following could be possibly happening:

1. Payroll increases are going up higher than what is passed on to customers.
2. A tightening market, more players, less contracts or fewer opportunities are causing firms to drop pricing and your inside sales people have followed pricing on the street.
3. Payroll has not increased more than normal, but inside sales is not increasing pricing, is not motivated to raise prices or finds it easier not to ask for more money if their compensation package does not encourage them to do so.  You should have incentives tied to gross profit for sales people in order to encourage price increases.
4. Rising percentages means lower labor quotes.  A rising percentage indicates someone is bidding lower pricing or maybe there are different types of products coming into the organization.
5. Declining percentages mean higher labor quotes or a higher percentage of outside work.  Declining percentages indicate your firm is getting better pricing, or that someone is bidding more work for your plant, but the work that you are bidding involves less labor cost and more material and outside services (outside firms with cheaper payroll).
6. Declining percentage may mean possible quoting problems.  There is a possible negative to this declining percentage especially if you invested a lot of money in new machinery and equipment and new work being bid involves more and more outside services versus using your capital.  To check this, measure the unused idle time on all your equipment.