There’s one ratio that says more about your studio’s financial health than almost anything else on your books: total payroll as a percentage of gross revenue.
This number has a ceiling. For an appointment-based studio like mine, that ceiling is around 35%. Below it, the business has room to breathe. But above it, you’ll feel the squeeze every time you run payroll. I have certainly been there.
Most of us miscalculate our payroll expense because we only count what we pay our instructors. But there’s also front desk (if you have it) and your pay as the owner. All three belong in the calculation.
Back to owner pay. I’m as guilty as the next person for leaving it out. I mean, for many years, it was an arbitrary number paid sporadically, if at all. So you leave it out because it’s inconsistent. Or because you can’t afford to pay yourself once all of the other bills are paid. Or, rarely, it’s because you don’t need the money. Either way, it makes the ratio look manageable when it is not.
I have a secondary benchmark for payroll health: each instructor on your roster ideally generates at least 3x their own compensation in revenue.
For example: if an instructor earns $3,000 a month, the sessions they teach should produce at least $9,000 in monthly revenue.
This is true for hourly teachers and especially for those on salary. Most of us have at least one teacher who is not hitting that threshold. Sometimes it’s because her schedule is filled with clients who are on “old rates.” Or perhaps she demanded higher pay. Or both. So it’s not that she is necessarily underperforming in the room. But the economics are out of alignment, and it compounds over time.
Admin or front desk pay is different. These are non-revenue earning roles, so the same benchmark doesn’t apply. Instead, this is an operating expense you ideally build into your business before making the hire.
Why studios end up over the ceiling
The payroll problem rarely starts with a bad decision. It usually starts with a desperate one.
Here’s a common scenario: new clients are rolling in but you’re short-staffed. A good teacher became available, so you paid what she asked. She’s a dream with your clients, and her schedule is now waitlisted. She asks for a raise. But it’s financially out of reach for you, so she leaves. You attempt to absorb the vacancy among your existing team but end up rehiring at the same (or higher) rate. And the ratio climbs a little higher.
I’ve done it myself a half-dozen times. It feels good to reward someone who thrives in your studio. But it’s not a happy ending. There is a ceiling on what you can pay, no matter how talented and popular that teacher is.
Getting the ratio back under the ceiling is one of the most complex problems I have worked through in my studio. It’s also the most grueling-yet-necessary work I provide for my coaching clients. There is no single lever. But there are specific ways to bring the number back to range without gutting your team.
What’s coming
I’m writing a short series on payroll, and in two weeks, my paid subscribers will receive free access to a diagnostic calculator (About that Payroll Ratio). With it, you’ll see specifically where the pressure is coming from. Coming on June 12.
Amanda