This set of blogs will take you behind some of the metrics you should be measuring in your business. We’ll talk about what they are, what they really mean and more.
Today we’re talking about your people. Hopefully we shouldn’t have to stress the importance of your people, but we will anyway, just in case. Your people are assets so it’s important to have measurements in place to ensure you are getting what you expect from your people and your people are getting what they expect from you.
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. Not to mention, total compensation also includes the employer’s responsibilities that go along with paying your employees, like Medicare, Social Security, unemployment and workforce safety insurance.
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.
When it comes to payroll, there are a lot of rules you have to follow. 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? Make sure you stay up-to-date on the regulations (and be timely with your reporting).
We get it…payroll is not a simple task, so outsourcing may be the best fit for your business. That’s right, there are organizations whose sole job it is to process payroll. Your part is then to 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.
So what about the payroll provider?
Well, there are traditional payroll providers who only process your payroll. These providers 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), compile the necessary reporting, W-2’s, etc. It’s a full-service payroll offering but 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). And don’t forget, there are online payroll solutions. (P.S. We do this too!)
There is also another option called a professional employer organization (PEO). These providers are all-in; 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 (you just don’t need to worry about the reporting piece). These providers often provide more than just payroll. 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-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)
|Salaries + Wages Expense||X|
|Benefits, Taxes + Insurance Expense
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 specific 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
See the difference? No liabilities to worry about (it’s on them).
Now let’s take a look at where payroll tracking gets a little more complex. Often payroll is tracked by profit centers (we’re talking customers, jobs, departments, product lines, etc.). And payroll is often categorized as direct, indirect, or operating. Don’t worry, we’ll explain.
Direct expenses are those directly related to providing your service or producing your product and are easily traced to a profit center. For example, the lady 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, the gentleman who fixes your equipment used on several jobs. Both of these are considered part of your costs of goods sold.
Operating expense 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 important to the business however it doesn’t relate directly to providing your service or producing your product.
How 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.
Also, there is an easy button here (not for payroll but for the entries). 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 (even better) a file you can import directly into your system.
What metrics should I be looking at from a people perspective?
On to the good stuff…there are various metrics when it comes to your people. To name a few…
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 % 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: Using a survey, you are able to 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 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 look at company-wide (average per employee) or you can get more granular and track them by each employee … how about that for accountability? The important thing to remember with setting your metrics is determining 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 help ensure you’re moving the business in the right direction.