3 Factors You Need To Consider When Budgeting for Payroll
10 Feb 2021
Payroll is one of the biggest and most important parts of a company’s budget. For most, or if not all organisations would have a revenue forecast for the financial year. As revenue is money coming in, and spending is money going out, this is where the importance of budgeting steps in. However, this is also the part where most businesses struggle.
It goes without saying that employees form the core of a successful organisation. For a productive and motivated workforce, payroll in the organisation has to be in check. Tardy payment or lack of sufficient funds to pay your employees could leave a substandard impression on them. Furthermore, you might end up running afoul of labour laws if you do not pay your employees when you are obliged to. To avoid such unpleasant situations, it is imperative to set aside a percentage of your revenue for payroll. The big question is: how much exactly should you be setting aside?
Here are a few guidelines that should help in the budgeting process for payroll:
The amount to pay your employees can take up a considerable portion of your payroll costs. The most basic compensation would be salaries and regular hourly wages. Other types of compensation might include payment to ad-hoc workers or part-timers. On top of the basic wages, employers have to take into consideration additional costs such as overtime pay, commissions, bonuses, severance pay, paid annual leaves, business expenses reimbursements and many others. Use past years’ payroll records with a breakdown of each payroll cost as a reference of how much costs are involved and set a budget ceiling. If you realise that there are certain payroll items that are continuously bursting that budget, minimise or eliminate it. For instance, if you are unable to offer a three months’ bonus to all employees, keep it at a minimum. Identify which are the key benefits that employees want. That way, you are able to budget your payroll costs appropriately without exceeding it.
Employer Taxes and Insurances
Employees taxes and insurance for workers’ compensation are typically mandatory under state law. Ensure that all employees are properly classified before doing estimated calculations on the taxes that your organisation is required to pay. Factor in additional tax payments such as employment training tax. As a rule of thumb, ensure that all tax records, employment training records or insurance contracts are properly recorded and filed. This will allow you to set aside sufficient funds from your payroll budget to cover these costs.
Economic Developments and Attrition
Changes in the economy has a direct impact on employees’ wages and payroll costs. As such, it is critical that you take into consideration the cost of living for the particular year into the estimated payroll budget. Additionally, the flow of new hires and resignations can play a significant role in your payroll budget. Estimate the organisation’s attrition rate and factor the percentage in when calculating salary increase. Taking these aspects into consideration will allow you to increase employees’ salaries without a substantial increase in your payroll budget.
Remember that there is no magical percentage that you should follow when setting your payroll budget. Keep in mind that there is no one size fits all and the budgeting process varies from company to company across different industries. Instead, determine which are the real costs of your employees and where unnecessary costs can be reduced to prevent exceeding of your payroll budget.
Related article: What Does Payroll Management Mean In HR?