What is your return on salary expense?

Entrepreneurship Matters
Dr Kudzanai Vere

Operating a business without due regard for all the operating expenses has destroyed a number of small and medium enterprises.

While there is need to pay attention to every expense, this article will particularly focus on labour (salary expense).

A company can be doing well in terms of the topline, but that does not mean all is well.

At the end of the month, the same company can report big losses. This normally comes from failure to manage operating costs, where salaries usually form a big portion.

What really is return on salary expense (ROSE)?

ROSE a productivity metric that every organisation must use to check whether it is getting the best returns out of the hired labour. It is also known as the payroll-to-revenue ratio.

How much are you generating in revenue terms given the size of your payroll?

The payroll total must be ascertained; this figure includes all the expenses towards employees as remuneration for a period expressed as a ratio or percentage of the revenue for that period.

The ratio speaks of the efficiency with which an organisation is using its labour force in its revenue-generation matrix.

A lower payroll-to-revenue ratio is taken to mean that labour is productive, obviously taking all other factors constant.

Therefore, ROSE = salary expense (total payroll) for a particular period x 100 ÷ net sales (revenue) for a particular period

Taking, for instance, a total payroll of US$2 000 and a net sales figure of US$10 000, the ROSE will thus be 0,20 x 100, which translates to a 20 percent ROSE.

A ROSE of 0,2, or 20 percent, means salary-related expenses account for 20 percent of the revenue received over the period. This percentage in isolation of some supporting facts does not make much sense in terms of influencing decision-making.

If you are in the pharmacy business, the ROSE is actually high due to hefty salaries accorded to pharmacists.

A very good and meaningful comparison can be made with companies in the same industry to come up with some industry averages. Industries that are labour intensive are likely to have a higher ROSE ratio.

This category includes mining, agriculture and professional services sectors, which are ordinarily heavily manned.

How to reduce the ROSE

This is where the biggest challenge is, especially for the small players who dodge business systems, processes and procedures in their day-to-day running of the business. Hire wisely and professionally.

Issues emanate from the recruitment and selection process. Do you have a system that checks people’s employment history, particularly their performance with former employers?

The quality of employees you have determines how far your business goes in productivity terms. If you have a culture of hiring relatives for the sake of it, it will be difficult to really push them to perform. Employees must be hired on merit and not relationships. They say once a business is incorporated, it becomes a separate legal persona that does not have any relatives to talk about.

In-house trainings

Productivity at work has a number of determinants, one of them being training. Once you hire people, you must subject them to some form of training on specific tasks and processes you want them to work on. These are company-specific and necessary for the attainment of organisational objectives. It helps to lower the ROSE ratio as trained people turn out to be more productive than untrained ones. On these trainings, you can either hire an expert in the area your team is deficient in or utilise those within the company who are good at issues in question.

This will save costs, but statistics have proved that hiring an outside person with a fresh mind can be more effective.

Replace unproductive workforce

A business is not a showroom to display people, or a beauty contest. It is about work that involves productivity. Do not hire a person whom you cannot fire. The tendency of keeping unproductive people at work is costly to the company for you will always have a higher ROSE ratio.

Everyone must be subjected to some training, and if they fail to improve, they are not broilers that can be kept for their meat.

They need to be offloaded lest they continue to cost the business.

Conclusion

If you are in business, be mindful of all the productivity metrics, particularly the ROSE, for, if you are not careful, you will end up being unprofitable and eventually wind up.

In most companies, salaries chew a bigger chunk of total revenue.