Salary Expense Is Your Road Map To Enhancing Profitability!

We know that salaries and wages is the largest single expense item on your Profit & Loss Statement.  It represents your investment in the efficient operation of your company and can mean the difference between profit and loss.  But is it just dollars and cents that dictate your success?  Read more.

I reported in an article last year on the relationship between your salaries and gross sales.  After analyzing thousands of financial statements over my career, it became very apparent that to maximize profitability salaries needed to represent 9% or less of gross sales.  When consulting with a client, this is the first calculation I will make if the dealer is having trouble with profitability.  You have to take care when calculating this percentage that it includes management, parts and accessories staff, sales staff, administration or office staff and service manager.  Service Technicians are a cost of the department’s sales, so they are not included.

So the first challenge is to ensure your salaries are within the target percentage for your volume of sales.  There are other intangible aspects of your labour force that need to be analyzed to maximize your return on this expense as well.  This is the hard part for management, because it speaks to the human element of your responsibilities.

Staff turnover can be a killer in business, but equally devastating is staff that are complacent about their job and work.  As the saying goes, a warm body is not enough to fill the job requirements.

To be successful in getting a good return on your investment from your employees you must also consider the following procedures:

Job Descriptions:  It is important to write a job description for every position in your company.  It serves to lay the ground work for your expectations of each staff member.  It is also your safety net to fall back on if someone is not doing a good job or refuses to complete certain tasks.

Periodic Reviews:  It is equally important to schedule periodic reviews of your employee’s performance.  People need to know if they are doing a good job and where they can improve.  It also lays the foundation if you have to let an employee go for non performance.

Establish Goals:  People will tend to improve their performance if they have targets such as a closing percentage for sales staff or efficiency rating for the service department.

Salary Scales:  An effective way to improve efficiency is to consider job rate versus salary in your service department.  Depending on the volume of business in your service department, you may improve your billable hours substantially if your technicians are paid by the job as opposed to an hourly wage.  Similarly, you may consider commission for your sales people or a combination of salary and commission.  Ultimately you want to give the right incentive for your employees to outperform your expectations.  This means more profit in your pocket.

Bonuses:  This is also a good method of giving your employees incentive to work harder to achieve their financial goals.  If the company does well, then they get to share in the success.  This is a great motivator.

Establish Your Expectations:  It is essential that you as owner or manager establish your expectations for each position in the company.  Once identified, you need to measure these expectations on a regular basis.  For example, if you are not getting your financial reports on a timely basis and when you do there are errors, you must address the situation immediately.  If the bookkeeper cannot conform to your expectations then it is time to move on.  Your financial data is the window into how your company is performing and if that information is incorrect or untimely, you are going to make bad decisions.

When working out your business plan for the next year, take a little extra time to think about your employees and your expectations.  First and foremost you have to establish   your salary target based on sales projections.  Second you need to achieve the best effort possible from your employees.  Incorporating some or all of these procedures will help improve efficiency and profit.

If you need help with job descriptions or any other aspect of employee management, contact me for a free consultation.

Comments (11)

This comment was minimized by the moderator on the site

hello chris

interesting article. i found it while researching return on labor cost as a valuation tool. btw where do you get that figure of 9% from? how do you take into account the profit margin and the specific business sector?

best regards

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