You Should be Tracking this One Thing In Your Business

There’s one key metric in business that’s often overlooked.

As the owner of a business, you may already have figures that you track.

Such as:

Income
Cost of Sales
Profit
Aged Debtors

You may also be keeping an eye on Profit as a percentage of Sales.

However if you’re operating a serviced based business and you have employees, are you keeping an eye on this…

Wages as a Percentage of Sales

Keeping an eye on your Sales figures is good
Keeping an eye on your Wages expenses is good
Keeping an eye on your Wages as a percentage of Sales can take you to the next level

As a service provider, wages are often your largest expense.

To maximise profitability, every dollar you spend on labour should be producing some type of return on revenue.

Throwing money at wages in the hope that it will result in increased sales and increased profit is a recipe for disaster.

You should know the relationship between wages and sales.

Specifically, you should know your wages as a percentage of sales.

If you take your eye off this metric, wages expenses can easily blow out with little in sales to show in return. If wage expenses are increasing and sales aren’t increasing, you need to know quickly so that you can decide whether changes need to be made.

How To Calculate Wages as a Percentage of Sales

You’ll need up an up to date monthly Profit & Loss report.

Formula

Wages expense divided by Sales, times by 100
Or
(Wages / Sales) x 100

Example:

Wages for August were $35,000
Sales for August were $60,000

$35,000 divided by $60,000
Times by 100 = 58%

Wages as a percentage of Sales =58%

Wages for September were $42,000
Sales for September were $62,000

$42,000 divided by $62,000
Times by 100 = 68%

Wages as a percentage of Sales = 68%

This example shows up upward trend – indicating steps may need to be taken to bring the percentage back down again.

If you rely on contractors to provide services directly to your customers, include these costs as part of your wages figure.

What does it mean if wages as a percentage of sales is increasing?

It may indicate that:

Employees are not working at capacity
You have high paid employees performing tasks that could be performed by lower paid employees
You’re not charging your customers enough
You have more employees than you need

This isn’t a complete list – but it gives you an idea.

Once you know your wages as a percentage of sales, you can start comparing them not only to your previous months, but also to others in your industry.

And it’s not to say you can’t pay high wages to your employees – but those higher wages should ideally be spent in the areas of your business and in the tasks that generate the highest revenue.

It’s really about taking control of your business, reducing risk and setting yourself up for financial success.

Any time you spend learning how to understand your business finances is time well spent. It’s an investment in the success of your business.

About us:

Festival Bookkeeping are a team of Xero advisers and bookkeepers located in Adelaide, South Australia. We help busy business owners and their teams Australia-wide. You can contact us on 0421 501 887 or sarina@festivalbookkeeping.com.au

Learn more about our bookkeeping services here: https://festivalbookkeeping.com.au/services/xero-bookkeeping-packages/

Looking for more helpful articles about bookkeeping and accounting? Try https://festivalbookkeeping.com.au/xero-payroll-4-common-mistakes and https://festivalbookkeeping.com.au/8-different-ways-to-bundle-your-services/

Read what our happy clients have to say here: https://festivalbookkeeping.com.au/testimonials/

This article should not be taken as legal or tax advice and you should consult with your financial professionals about your unique financial situation before acting on anything discussed in these articles. These articles are intended to help small business owners become more aware of certain issues and topics, but we cannot give blanket advice to a broad audience.