Measur ing t h e F i n a n ci al Re t urn
o f You r I nv e s t me n t i n P e ople
JIM PARRISH
FLORIDA SBDC
AT USF
In spite of payroll
frequently being the
single largest expense
(exclusive of cost
of goods sold) for
most businesses, few
business owners do
any sort of quantitative
analysis to determine
the financial return
of their investment
in people (payroll
expense).
According to Jim
Parrish, Growth
Acceleration
consultant with the
Florida SBDC at
University of South
Florida, “Owners
should make an
appropriate riskadjusted rate of
return on their business investment. In order
to determine if they are achieving this goal,
it is critical that owners continually track the
profitability of their investment in their people.
This should be done on a monthly basis in order
to spot trends and take actions designed to
continually improve financial performance.”
Owners attempting to determine the
effectiveness of the investment in people,
generally seek out industry statistics. While
industry data is helpful, it also has limitations.
Using annual data ignores seasonality and/or
significant swings in monthly sales, profits, and
payroll costs.
In addition, this data is usually stated as
a percentage of sales causing significant
fluctuations to appear to be less significant than
they actually are. See the following example:
2012
2013
$3,000,000
$3,100,000
GROSS PROFIT MARGIN
40%
38%
PAYROLL/SALES
30%
32%
SALES
SO, ABC COMPANY HAD ONLY A 2 PERCENT DECLINE IN GROSS PROFITS AND A 2 PERCENT INCREASE IN
PAYROLL, NEITHER OF WHICH APPEAR TO BE AREAS OF SIGNIFICANT CONCERN. HOWEVER, LET’S LOOK AT THE
NUMBERS A LITTLE CLOSER AS SHOWN IN THE FOLLOWING TABLE.
2012
2013
Change
$3,000,000
$3,100,000
$100,000
GROSS PROFIT
40%
38%
- $22,000
PAYROLL
30%
32%
+ $92,000
SALES/PAYROLL
$3.33
$3.12
- $.21 (-6.3%)
GROSS PROFITS/PAYROLL
$1.33
$1.19
- $.14 (-10.5%)
SALES
In spite of the increase
in sales in 2013,
after subtracting the
two major expense
items, the company
generated$114,000 less
than it did in 2012.
Thus, the return to
the company of its
investment in payroll in
2013 was significantly
less effective than 2012.
This would have been
obvious if the company
had looked at these
items as multipliers.
In other words, for
every dollar invested in
payroll how much did
the employees generate
in Sales and Gross
Profits. By looking at
the same data from a
multiplier perspective,
the trend appears more
significant.
The decline in the
effectiveness of the
investment in payroll
for sales (-6.3 percent)
and gross profits
(-10.5 percent) is more
obvious.
According to
Parrish, Using
Multipliers
provide business
owners: A clearer
understanding of
the magnitude of
changes than does
the percentage of
sales method.
Us