Retail Payroll: How to Calculate Your Payroll Percentage

For most retail owners, budgeting payroll expenses is no easy task. Meeting customers’ needs while maintaining a healthy payroll percentage may sound simple enough, but it is usually more complicated than it seems. If you’re new in the business, or you feel that your payroll percentage needs further improvement, knowing how to get the most from your payroll dollars should be a top priority. To do this, you need to start with the basics.     

Payroll Expense 101: What Goes Into the Payroll?

By definition, payroll expense includes all the salaries and wages given to employees in exchange for their labor, including all the employee benefits and related payroll taxes. Depending on your location, you may be required to pay for the following taxes and insurance:

  • Employer’s matching payments for Social Security and Medicare;
  • State and federal unemployment tax;
  • Industrial insurance;
  • Workers’ compensation;
  • Local payroll tax;
  • Employment training tax.

Calculating Retail Payroll Percentage: Doing the Math

How do you know how much of your sales goes into making payroll? It’s quite straightforward. In calculating sales-to-payroll percentage, you simply take your company’s gross payroll expense for a particular period, divide it by the total sales incurred during the same period, and multiply the result by 100. So, if your retail outlet makes $375,000 in annual sales and your labor expenses amounts to $65,000 per year, 17.33% of your sales goes to your payroll.

Generally, businesses aim for a lower retail payroll percentage, since it indicates that each employee is bringing in more sales revenue. The ratio remains more or less constant, even as the business grows, since payroll expenses and sales revenue should ideally move in the same direction.

Thus, you may need to watch out for significant changes in your retail payroll percentage. A noticeably increasing ratio may result from reduced productivity or high employee turnover, while a significantly decreasing ratio may indicate that you may not have enough manpower to support your operations.

Industry Payroll Percentages: What’s a Healthy Sales-to-Payroll Ratio?

Payroll percentages vary widely among industries. It even varies significantly among companies in the same industry. According to Bizstats.com, the retail industry has the second lowest payroll percentage (19.20%) while the professional/technical/scientific services industry has the highest (97.36%).

To illustrate how payroll percentages vary within industries, particularly within the retail industry, here are the average figures from Bizstat.coms’s 2013 Sole Proprietorships: Labor plus Owner’s Compensation table.

  • Furniture stores: 31.87%
  • Non-store retailers: 30.05% 
  • Clothing and accessories stores: 24.12%
  • General merchandise stores: 15.03%
  • Food and beverage store: 13.29%
  • Gas stations: 6.54%

These figures merely serve as an indication of what’s normal in your particular niche or industry, so don’t panic if your company’s sales-to-payroll ratio does not look as good. Instead, make an effort to know why your percentage is suboptimal so you can do something to correct the situation.

Factors Affecting Retail Payroll Percentage

Events. Local community or mall events and other big events (Black Friday, Cyber Monday, Valentine’s Day, etc.) can draw in hordes of foot traffic to your store. On the other hand, you may experience a slower period when your local pro team makes it to the playoffs, since your audience may choose to stay home and watch the game.

Weather. Is it pouring? People may stay home rather than going shopping. While you obviously can’t plan a business model around individual weather days, knowing if there’s a rainy season vs. a dry season, if your area typically has major weather issues, and so on is always important to account for.

Season. According to CNBC.com, there is always a best season to buy certain things, so you need to be prepared for a significant increase in foot traffic during these times. For example, if you’re in the business of selling fitness equipment, expect manufacturers to offer great deals in January. Cameras and chocolates sell great in February, while luggage sells like hotcakes in March and August. Thus, you may need to adjust your staffing level accordingly to accommodate the sudden influx of interested customers during these periods.

You also need to pay particular attention to your staffing levels right before the season changes (this is especially true for clothing stores), before and during the annual holidays, and during the back-to-school season. Once the peak season is completed, you should reduce the workforce as needed until you next need to staff up. Be very clear when hiring that you’re hiring for temp positions, as otherwise, sudden large-scale staff reductions can hurt morale.

Staffing levels. You might think that you’ll have a healthier payroll percentage if you have fewer employees, right? Well, it doesn’t always work that way! Understaffing may lead to overtime accrual, which is considered the largest contributing factor to increased labor costs, according to the Bureau of Labor Statistics. Additionally, lack of qualified salespeople on the floor can easily frustrate customers and may result in fewer sales.

Length of business operation. Startups may not have the economies of scale or the right systems in place that will allow them to have a healthy payroll percentage.

Growth strategy. Some companies choose to provide more than the average pay to keep high-performing employees and reduce employee turnover. Hiring and training new employees can be pretty expensive, and may cost anywhere from $1,000 (for entry-level service jobs) to $5,000 (for jobs in professional settings).

Improving Sales-to-Payroll Ratio: The Key to Getting it Right

No matter what the reason is, you need to get a tight rein on your labor costs to make a profit and keep your business afloat. How do you do it? Here are some helpful suggestions from the experts.

Ensure adequate staffing. Know your store’s peak sales periods and make sure you have enough staff to handle the workload. For many retail establishments, the opening hours typically have a spike of traffic. You can also expect increased foot traffic around 3:00 PM when school ends, and around 5:00 PM as people go home from work. Retail stores are also busiest during holidays, special sales and other events, weekends, and the first day of the month.

Have a flexible workforce. Personal issues such as illnesses, family and child issues, and lack of reliable transportation can affect your staffing schedule, so you’ll need a more flexible workforce. Aside from your full-time staff, consider hiring temporary and part-time staff to cope with the changing workload and prevent overtime accrual. Hiring freelance staff and outsourcing some of your workload will also help promote a healthier payroll percentage.

Boost productivity. Conduct regular performance evaluations and offer rewards for good performance. Performance bonuses and merit-based raises are great motivators, but non-monetary incentives like additional days off will work just as well

Improve Your Payroll Percentage with Our Top-Notch Bookkeeping and Payroll Services

By partnering with a company like BackOffice Solutions, you can get the service you need when you need it. We can manage your payroll, take care of your tax returns, and reconcile your accounts at very reasonable rates. With our bookkeeping and payroll services, you can save time and assure government compliance while improving your payroll percentage.

Contact BackOffice Solutions today for a free quote, and let us take the load off your plate.