Is Payroll an Expense or Investment?

Is your payroll an investment or an expense? It depends. Your payroll is an expense if your team members are unaware of the importance of the business they work for being profitable and their ability to impact profitability. When your team members understand why it should matter to them that your business is profitable and how they can impact profit, your payroll becomes an investment.

Talking about profit with team members can be a very uncomfortable conversation. Fears come up:

“What if they think I’m greedy?” or “What will they think if I tell them we’re not profitable?”

It doesn’t have to be a difficult conversation.

Working for a profitable business is much more desirable than working for a business struggling with cash flow. There is no job security in a business that barely makes ends meet, month after month.

Think of profit in business like having an emergency savings account in your personal financial plan. Profit ensures a cash cushion for unexpected events. Profit allows a business to survive during crises (e.g., COVID). Profit is money that is not being used to run the business. A profitable company is a healthy, thriving company offering job security and opportunities for growth and advancement to team members.

While your team may be aware of large sales in the business, they may need to learn what it costs you to run the business, pay a team and cover the hidden costs of mistakes and rework. It helps to detail the hidden costs of payroll to help team members understand their take-home pay is only a portion of what it costs to employ them. This provides an opportunity to discuss each team member’s responsibility to create a return on the investment for the business.

Related: How to Solve 5 of The Biggest Global Payroll Challenges

Here is a script you might use in this discussion:

“The paycheck you take home tells only part of the story. To provide you with your regular paycheck, we can roughly estimate it costs us an additional 30-40% to employ you. Not only does it cost us your paycheck, but other costs include training, benefits, leave time, space, furnishing, equipment and other supplies.

Soft costs that are harder to estimate include rework due to oversights and mistakes, any periods of reduced productivity (e.g., when you come to work tired, distracted, etc) and management overhead (i.e., the use of a manager’s time to oversee the work you are doing).

For example:

Using 30-40% as a rough estimate of the additional costs of employing a person, let’s say a team member brings home $40,000/year. That means that role costs us roughly between $52,000 and $56,000 per year.

To attain a minimal 2:1 return on investment in what we pay that team member, the team member needs to add a value of $104,000 – $112,000 per year.”

To be profitable, a company must make more than it spends. Team members who find ways to take exceptional care of top clients, increase sales and save the company money add significant value to the company and contribute to profitability.

Many team members can identify opportunities to increase sales. Every team member has the opportunity to identify ways to work more effectively and reduce inefficiency to save the company money.

One of my clients talked to his team about their role in contributing to profit. After the talk, he asked them to return the following week with a list of 5 ways to save the company money. By the end of the second meeting, the team had identified over $200,000 in savings for the company!

Conduct a task audit with team members at least annually. It’s easy for new initiatives to occur and for tasks to become irrelevant. Meanwhile, leaders in the company are unaware that team members are carrying out tasks that are not connected in any meaningful way to current initiatives and areas of focus within the company. If your company has experienced rapid growth, you are particularly vulnerable. It takes all team members engaging in task audits to reduce waste and inefficiency.

As business owners, it’s our responsibility to educate our team members about the company’s sweet spot and top clients. We must ensure each team member understands how their role contributes to the company’s sweet spot. Don’t be surprised when team members spot innovation opportunities once they understand the sweet spot. This understanding makes their contributions and insights more valuable.

It’s also important that team members understand that covering up mistakes can cost the company money. Creating a culture that views mistakes as learning opportunities makes it easier for team members to come forward when a problem arises.

Related: This Is Why You Need to Talk Money With Your Employees

Be cautious in retaining team members who repeatedly make mistakes. One of my clients terminated a team member for making a similar mistake repeatedly. Once that employee’s work was redistributed, team members discovered more errors. Just one of those mistakes had a $25,000 impact. This lesson was painful for the business owner who tolerated mediocre performance. It also was an insight for the remaining team members, at least two of whom were aware the team member was frequently distracted on social media when doing work but had been reluctant to bring this to the business owner’s attention. To this business owner’s credit, he addressed this as a learning opportunity for himself and the team. As they went forward, the team was much more conscientious, and loss due to rework dropped by 10% in the coming quarter.

Profit creates growth opportunities, pay raises and promotions. When team members understand this, they work hard to do their part to contribute to the company’s profit.

I recommend having this conversation with your team at least twice yearly and making it a part of your onboarding process. Here’s to your profit!