Payroll to Revenue Ratio

Date created: Feb 15, 2019  •   Last updated: Oct 15, 2021

What is Payroll to Revenue Ratio?

Payroll to Revenue Ratio is a productivity metric that measures how effective a business is at utilizing its labour costs to produce revenue. As with any ratio, it's always important to understand both the numerator and the denominator and how changes to either will impact the number.

Alternate names: Labour Costs To Revenue Ratio, Labour to Revenue Ratio

Formula

ƒ Sum(Labour Costs) / Sum(Net Sales)

How to calculate

For a given time period, our Labour Costs are $250,000. For that same period, Net Sales are $500,000. Payroll To Profit Ratio = $250,000 / $500,000 = 0.5 or 50% Using the example above, if the $500,000 in Net Sales were achievable with only $200,000 in labour costs, then the ratio would improve to 40%.

Payroll to Revenue Ratio

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What is a good Payroll to Revenue Ratio benchmark?

Most businesses will fall between 15% and 30%. According to PWC, manufacturing was at 18%, hospitals at 45% and insurance companies at 9%.

Payroll to Revenue Ratio visualization example

Here's one way you can look at your data. Track your labour costs against your net sales to derive your Payroll to Revenue Ratio and use this data to notice changes in your ratio over time. The chart shows an example of what your Payroll to Revenue Ratio could look like:

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Payroll to Revenue Ratio

18.46%

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1.00

vs previous period

Comparison Chart

Here's an example of how to visualize your current Payroll to Revenue Ratio data in comparison to a previous time period or date range.
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More about this metric

This metric is easily comparable within industries and geographies, and should also be tracked over time to understand trends in workforce productivity, such as the impact of training, or staffing changes.

Directionally, you want the Payroll To Profit Ratio to decrease, which means your ability to utilize your workforce to generate Revenue is more efficient.