If you care about numbers and the story they tell, you should do this calculation.

If your gross annual revenue is $500,000 and you spend $100,000 on payroll for the year, your gross revenue to payroll percentage is $500,000/$100,000 = 0.20 or 20%.

Payroll is the total amount paid for labor, including wages, bonuses, benefits, employment taxes, insurance, and owner draws.

Note that in some industries a payroll that exceeds 30% of gross revenue is one of the most common reasons businesses fail.

In service-based businesses, payroll is the major cost so can be up to 50% without destroying profitability.

Manufacturers and restaurants should maintain a payroll number at 30% or less. Manufacturers have the cost of manufacturing the product plus payroll in their costs. Restaurants have the high cost of food ingredients to consider along with the cost of talent.

If you are a business owner, be sure to include yourself in the payroll equation. It doesn’t matter if you get a traditional paycheck or an owner’s draw. Both should be included in any payroll calculations.

Now the next calculation to consider is the productivity of your employees.

Take the total output and divide it by the total input. If your company makes $60,000 in goods and services in 1200 hours, then the total productivity is $50 of income per hour of work.

It can be difficult to calculate this for each employee based on how each person contributes to the bottom-line. But you can know this number for all your employees, and you can set a target level of productivity.

Using incentive programs is one way to increase employee productivity and business profitability.

Sources: Small Business Chron, The Bottom Line Group, and Second Wind Consultants