This series will take you behind some of the metrics you should be measuring in your business, including: profit, accounts payable and receivable, inventory and payroll. We’ll talk about what they are, what they really mean and more.
People are an integral part of any business, so we shouldn’t have to stress their importance. Your people are some of your biggest assets, and having measurements in place can ensure you are getting what you expect from them and vice versa.
When it comes to the numbers, your payroll expense represents the total compensation you pay to your employees. Total compensation is more than just the salaries and wages you pay; it also takes into account the benefits you give your employees, like paid time off, 401(k) or health, dental and vision insurance. Total compensation also includes the responsibilities that go along with paying your employees, like Medicare, Social Security, unemployment and workforce safety insurance
Payroll can be confusing. It doesn’t have to be.
How do I handle payroll?
It’s really up to you and how you want your business to function. As with most things, you can do it in-house or have it outsourced. Payroll involves a lot of rules: for example, there are rules on how much your people need to get paid (minimum wages and salaries, overtime, etc.), when you need to remit taxes and insurances to the respective agency, fair compensation, taxable fringe benefits, multi-state payroll…the list goes on. Our advice if you’re doing payroll in-house is to make sure you stay up to date on the regulations, and be timely with your reporting.
Payroll is clearly not a simple task, which is why many businesses choose to outsource. There are organizations who specialize in processing payroll and can take the pressure off your business. When you outsource payroll duties, all you need to do is share the necessary employee information, submit the hours worked (for some providers this is handled through the cloud, so your part is very limited) and approve the payroll.
There are a couple different types of payroll providers: traditional providers and professional employer organizations (PEOs). Traditional payroll providers can work in-person or online. They will run the payroll, create checks or initiate direct deposits, initiate payments for taxes and insurances to the respective agency (or let you know when to submit the payments) and compile the necessary reporting, W-2’s, etc. This is a full-service payroll offering, but when using traditional providers, all of the reporting liability remains with you and your company. That means if there is a reporting error, it’s on you—but you shouldn’t have to worry if you are working with a reputable provider.
While traditional payroll providers only process your payroll, professional employer organizations do a whole lot more. They like to refer to themselves as co-employers. This means, for reporting purposes, the PEO is the employer—so the liability of a reporting error is on them. However, you are still the employer from a legal standpoint, which means you still make all the decisions without having to worry about the reporting piece. These providers often offer additional services as well; for example, they can be your benefits manager, human resource manager, safety coordinator, workers’ compensation manager and more!
The important thing to remember is that every business is different, and you need to find the solution that best fits your organization. Just like with everything else, there isn’t a one-size-fits-all solution.
How do I track payroll?
Let’s take a look at payroll from an overall perspective first. A typical payroll entry will look something like this (regardless of if you are doing payroll in-house or using a traditional payroll provider):
|Benefits, Taxes + Insurance Payable (Employer + Employee Portions)||X|
|Salaries + Wages Expenses||X|
|Benefits, Taxes + Insurance Expense (Employer Portions)||X|
The amount of the liabilities (payables) recorded will depend on the required frequency of payment. Some taxes are due within days of running a payroll, others are due quarterly or even annually. It all depends on the specifics of your business.
If you are using a PEO, a typical payroll entry will look something like this:
|Salaries + Wages Expense||X|
|Benefits, Taxes + Insurance Expense (Employer Portions)||X|
See the difference? No liabilities to worry about; it’s on them.
Now let’s examine the complexities of payroll tracking. Payroll is often tracked by profit centers (customers, jobs, departments, product lines, etc.) and often categorized as direct, indirect or operating. Direct expenses are those directly related to providing your service or producing your product and are easily traced to a profit center: for example, someone who works on Job #123 for 8 hours). Indirect expenses, on the other hand, are those related to providing your service or producing your product but are not easily traced to a specific profit center: for example, someone who fixes your equipment that is used on several jobs. Both of these are considered part of your costs of goods sold.
Operating expenses are those not directly related to providing your service or producing your product. For example, your office manager would be considered an operating expense. The office manager role is obviously important to the business, but this role doesn’t relate directly to providing your service or producing your product.
The way you track your payroll will impact the very basic entries presented above. The important lesson here is you should spend time on the front end determining what information is important to you from a decision-making perspective and have your system (or your provider’s system) set up to facilitate this tracking properly from the start. As far as the entries, there are a few ways to simplify the process. Once everything is set-up properly, your system will allocate the payroll to the proper accounts for you. Your provider can also provide you with the correct entry or a file that you can import directly into your system.
Follow proper payroll procedure, or it could cost your organization.
What metrics should I be looking at from a people perspective?
There are a wide variety of metrics to consider when it comes to your people. These metrics include the following:
- Human Capital Value Add (HCVA):This is calculated by taking your revenues less your non-employee related costs divided by the number of full-time equivalents. This metric will measure the profitability of your average employee.
- Compensation as a Percentage of Revenue:This is calculated by taking all of your employee related costs divided by your revenue. When looking at the trend, you are able to measure whether your investment in your people is resulting in increased revenues.
- Employee Satisfaction:Through the use of a survey, you can measure overall employee happiness, which can relate to productivity, retention, culture, etc. This is an example of the type of non-financial metrics you can use to measure your business.
- Number of Full-Time Equivalents:This is a good number to know in order to keep tabs on the growth of your workforce over time. There are a couple ways to arrive at the number of full-time equivalents (FTEs). First, you can take the total hours for your workforce and divide by 2,080. Or you can complete the calculation for each of your part-time employees individually. Your full-time employees equal one FTE.
- Employee Productivity Rate:This is calculated by taking your revenue divided by the number of full-time equivalents. This metric will measure the productivity of your average employee.
- Training Time:This is calculated by taking the number of training hours (or dollars) divided by the number of full-time equivalents. This metric will measure the amount of training the average employee is receiving.
Many of these “people metrics” can be examined company-wide (average per employee), or you can get more granular and track them by each employee. The important thing to remember when it comes to setting your metrics is that you’ll need to determine which ones will drive your business towards your vision.
The moral of the story: keeping a close eye on your people (and the cost of your people) is a win-win. Your employees will be happier, and you will rest assured that you’re moving the business in the right direction.
Payroll is a critical component of your accounting. It’s important you understand it.