Hiring and managing staff is one of the most critical and challenging aspects of running a small business. As a business owner, it’s essential to evaluate whether your employees are contributing to your bottom line, determine how much of your revenue should be allocated to payroll, and assess whether you’re ready to bring on additional staff—all while ensuring you’re paying yourself. Let’s dive into these important considerations.

1. Are Your Employees Paying for Themselves?

Your employees should be assets to your business, and their contributions should ideally exceed their cost. Here’s how to evaluate this:

Track Their Contributions

• Revenue Generators: For staff in sales or customer-facing roles, measure their direct impact on revenue. For example, how many sales are they closing or how many customers are they retaining?

• Productivity Enhancers: For operational roles, assess how much time, money, or resources they save the business. For example, does their work allow you to focus on higher-value tasks?

Set Measurable KPIs

Establish clear performance metrics for each role. For example:

• Sales targets for revenue-driving employees.

• Time or cost savings benchmarks for support roles.

Evaluate Regularly

Don’t wait until the end of the year. Review employee performance quarterly to ensure their contributions align with their compensation.

2. What Percentage of Revenue Should Go to Payroll?

Determining how much of your revenue to allocate to payroll depends on your industry, business model, and growth stage. However, here are some general guidelines:

Small Business Rule of Thumb

• For most small businesses, payroll typically falls between 15% and 30% of revenue.

• Retail and restaurant businesses might be closer to 25%-30%.

• Service-based businesses often aim for 20%-25%.

Consider Other Expenses

Remember, payroll isn’t just wages—it includes taxes, benefits, and worker’s compensation. Make sure you account for the total cost of employment when calculating your percentage.

Profitability First

Ensure your payroll costs allow room for profit. If payroll costs are consuming too much of your revenue, evaluate whether you can adjust hours, redistribute responsibilities, or increase efficiency.

3. When Can You Afford to Bring on Employees?

Adding employees can help you grow, but it’s a big financial commitment. Consider the following before hiring:

Signs You’re Ready

• You’re turning down work because you’re overwhelmed.

• Tasks are falling through the cracks due to lack of time.

• Your current staff is overburdened, and productivity is suffering.

• Your business has a steady cash flow and predictable revenue.

Run the Numbers

• Calculate the total cost of hiring, including wages, benefits, training, and onboarding.

• Compare this cost to the expected revenue or efficiency the new hire will bring.

Start Small

• If you’re hesitant, consider part-time or contract employees.

• Outsource non-core tasks like bookkeeping, social media, or marketing to free up your time.

4. Are You Paying Yourself?

As a business owner, it’s easy to put yourself last, but this can lead to burnout and financial instability. Here’s why paying yourself is essential:

Your Work Has Value

If you’re running your business full-time, you should treat yourself as an employee. Pay yourself a consistent salary that reflects the work you’re doing.

Set a Pay Schedule

• Start by allocating at least 10%-20% of your revenue to owner compensation.

• Once you’ve covered operating expenses, reinvested in the business, and maintained a healthy cash reserve, increase your pay accordingly.

Separate Business and Personal Finances

Paying yourself ensures that your business finances remain separate from personal expenses, making it easier to track profitability and plan for growth.

5. Tips for Managing Payroll Effectively

Invest in Payroll Software

Streamline payroll processes with tools like QuickBooks, Gusto, or ADP to ensure accuracy and save time.

Create a Budget

Include payroll costs in your monthly budget to stay on track.

Monitor Profit Margins

Regularly review your profit margins to ensure payroll costs are sustainable.

Consider Incentives Over Raises

For example, offer bonuses tied to performance rather than permanent wage increases.

6. When Things Aren’t Adding Up

If payroll costs are too high or employees aren’t paying for themselves, take action:

• Reassign Tasks: Ensure every role adds value to the business.

• Improve Training: Equip employees to be more efficient and effective.

• Increase Prices: Adjust pricing to improve revenue without increasing workload.

• Cut Costs Elsewhere: Look for opportunities to save in other areas of the business.

Final Thoughts

Payroll decisions can make or break a small business. By regularly evaluating your employees’ contributions, aligning payroll with revenue, and ensuring you’re paying yourself, you can create a sustainable foundation for growth. Remember, hiring staff is an investment, and like any investment, it requires careful planning and monitoring.

If you’re unsure about your numbers or need guidance, reach out to a business coach, accountant, or trusted mentor. At Get Local, we’re here to support small businesses like yours with advice, resources, and networking opportunities.

Are you ready to take control of your payroll and profitability? Let’s get started!

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