Here at CRM, we work with a variety of businesses as well as having our more narrow areas of specialism. However, one measure that we find is often considered in most sectors is the amount it costs a business owner in wage costs to deliver the income levels they achieve.
As wages are often one of the higher costs for business, this is a measure that is very often at the forefront of mind for business owners and employers in three of our specialist areas; Hospitality, Professional services and Construction.
Wages to income is usually measured the same way, but often referenced for a variety of reasons and can lead to many different management decisions. The measure is to establish the percentage, proportion or amount of income which is being generated in relation to the Wage Costs.
Most commonly, the Wage to Income ratio can be calculated by dividing the total wage costs (often now including NI and Pension contributions) by the total income. There will be occasions when it is better to drill down further, for example by department, with a more specific relevance such as Sales Staff Wages, commission & other costs by the Sales generated. The result of this measure is often expressed as a number, fraction or as a percentage, with the lower number or percentage often more favourable.
Most often the outcome is used as a performance measure or operational metric to establish productivity.
At a basic level, a month on month management KPI can measure whether the same or different level of investment in people can deliver the same level of return in income. This may be measuring the productivity outcome of consistently employing the same people or an exploration of utilising different levels of qualified or pay level resources to see if they are more efficient or not. We have seen other clients measure the effectiveness (or not) of offering an incentive to drive a desired level of output.
An established business with a consistent number for this ratio can often better plan their growth by assuming a replication of the cost, or part of, could bring the same proportion of income. This was a point we heard a client make recently in relation to an acquisition, with his believe of generating a higher level of income from the business he was acquiring based on their level of resources and Wage to income ratio.
In a Sales-orientated business the metric is often used to break down even further by employee to track actual sales performance beyond the team level.
When wage costs are considered direct costs and form part of the cost of sales, then we find this measure is often closely considered to maintain a healthy, desirable gross margin. However, when a business has a fixed overhead for wages, this area can often be overlooked and the danger is then this cost becoming a hidden cost in the day to day function of the business.
If you would like to explore this ratio for your business further or have a discussion about the financial ratios relevant to your business, then please call us on 01865 379272.