Paying yourself and your staff shouldn’t be a struggle each month. Read on for how you can manage payroll.
Payroll is the largest expense your business is going to face. Just because it’s expensive doesn’t mean you don’t need the help. If you’re struggling to pay your employees every month, you might just not have enough real revenue.
According to Mike Michalowicz, author of Profit First, real revenue should be four times your total payroll (including benefits). Real revenue is defined as top-line revenue minus material and subcontractor costs.
For example, a business owner could have top-line revenue of $600,000, materials and subcontractor costs of $200,000, totaling $400,000 in real revenue. This means payroll should be $100,000.
Payroll: For Yourself!
Yes, you really can afford to pay yourself a business owner’s wage. Your payroll also happens to be determined by real revenue as well.
For business’s with real revenue of $250,000, the owner’s compensation should be 50%. For real revenue of $250,000 – $500,000, the owner should be paid 35%. Real revenue up to $1,000,000 should have owners seeing 20% of that back.
If you aren’t able to pay yourself the salary you deserve, check out your operating expenses and see where you can cut. This change won’t see results overnight, but it’s a start.
Inspiration for this post came from “Meeting Payroll” by Marcia Donaldson published in the April 2022 issue of American Quilt Retailer. Stay tuned next week for how to manage your cash flow and knowing if you can afford additional employees.
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