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.
How to calculate Payroll to Revenue Ratio
ƒ Sum(Labour Costs) / Sum(Net Sales)
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%.
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%.
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.
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