Walking the Fine Line on Payroll Expenses - Financials
Construction Equipment Distribution magazine is published by the Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada. AED membership also includes equipment manufacturers and industry-service firms. CED magazine has been published continuously since 1920. Associated Equipment Distributors
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Walking the Fine Line on Payroll Expenses

By Dr. Albert D. Bates

Article Date: 06-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.

The sales-to-payroll delta is a critical planning tool that demonstrates how controlling the ratio between sales and compensation is even more important to the dealer's bottom line than the rate at which sales grow.

Payroll control is a critical issue for all AED members. According to
the latest CODB report, payroll and associated fringe benefits account for 58.8 percent of total expenses. In slightly different terms, payroll costs are 1.4 times as large as all other expenses combined.
One important challenge in controlling payroll is finding a practical procedure for planning what payroll costs should be. It is not enough to simply suggest that payroll should be a lower percentage of sales since that does not suggest how much lower payroll costs should be or how fast a reduction can be made.Firms also face the very real issue that reducing payroll too much may diminish the firm's ability to service its customer set effectively. Indeed, payroll costs can be too low as well as too high.This report examines an approach for planning payroll called the sales-to-payroll delta, and will address two specific issues:
  • Targeting the Sales-to-Payroll Delta - An explanation of the concept plus a suggestion of some specific goals for planning payroll in the future.
  • Making Specific Improvements- A review of the opportunities for improving payroll performance.
It is a lot easier to talk about making payroll improvements than it is to actually make them. All the sales-to-payroll delta can do is suggest the magnitude of the improvements that are needed to reach higher levels of profitability. The goals need to be translated into specific actions.As was noted earlier, generating a sales-to-payroll delta is much easier when sales are increasing. This means that the focus should be on creating an environment in which the firm generates modest sales growth continually. In essence, the firm must stop being captive to either market growth or prevailing economic conditions.This conclusion leads back to a recurring theme in profit planning. AED members must gain control over operating economics. This involves making significant improvements in three areas:
  • Sales per Order Line - If the average line value on an invoice can be increased, then for the same level of expense, the firm generates more profit.
  • Lines per Order - Working with customers to add one more line on every order creates more sales, but only a little more expense.
  • Fill Rate - When the firm is out of stock a lot of effort is expended for no sales. A higher fill rate is always beneficial from a sales viewpoint.
Payroll is likely to be an issue for AED members in perpetuity. Employees will always desire improved wages, and health insurance seems destined to increase at a significant rate. Firms must gain control over the payroll side, even in periods of modest sales growth. The sales-to-payroll delta is the most beneficial concept in planning for payroll control. 
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Article Categories:  Financial