Keep Labour Costs Down & Protect Your Profits by Implementing a Salary Cap
In a previous blog we discussed how 10- to 15-percent profitability should be your company goal. But how can you achieve it during that black hole period when you’ll need to hire new staff to fulfil growing demand? First you need to understand the relationship between labour costs and profitability. You already know that labour is a significant cost in running a business. But unlike most other expenses labour is a cost you can control. And that’s exactly why you should introduce a salary cap to protect at least 10% of your profits.
Imagine you’re earning €200,000 in revenue. In this case you should aim for profits of at least €20,0000. Combine all of your non-labour costs and subtract them from your €200,000 operating budget. Whatever is left is your company’s total salary cap and should include all labour costs (including your own market-based wage). As you grow use the salary cap as an anchor to fluctuate between 10- to 15-percent profitability. So once you have a salary cap based on ten percent profits you can set your goal on growing profits to 15 percent by recalculating your salary cap accordingly.
During this period you should focus on enhancing productivity rather than growing revenue. Once you’re at 15 percent profitability you can then afford to hire new staff strategically (with the goal of increasing your revenue) until your profits are back near ten percent. Repeating this process again and again is the best way to safely grow your business while always remaining profitable. If you’re worried that the salary cap will limit your company’s ability to perform examples of successful companies that adapt such a strategy are all around you. You just rarely hear about it as it doesn’t garner the sexy headlines that revenue growth gets in the financial media.
Many modern organisations gets more for every euro they spend by hiring younger talent and investing in their future. And you can do that too!
Contact Us at Avid Partners on 0818 303087. Email us at advice@avidpartners.ie. We love to hear from small businesses and how they are doing!
Extracts taken from Simple Numbers, Big Profits. Blinkist Blog
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