Fully staffed. Still squeezed.
There is one ratio that will tell you more about your studio’s financial health than almost anything else on your books: your total payroll as a percentage of gross revenue.
This number has a ceiling. For an appointment-based business, that ceiling is 40%. Below it, the business has room to breathe. But above it, you’ll feel the squeeze every time you run payroll.
Three buckets, one number
Most of us miscalculate our payroll expense because we only count what we pay our teachers.
Payroll has three components: teacher pay, front desk pay and owner pay. All three belong in the calculation.
Leaving out owner compensation is the most common mistake. Maybe you can’t afford to pay yourself once all of the other bills are paid (common). Or maybe you don’t need the money (rarer). Either way, it makes the ratio look manageable when it is not. You are still a cost to the business. If you are not counting yourself, you are not reading your own numbers accurately.
The 3x rule
I have a secondary benchmark for payroll health: each teacher on your roster should generate at least three times their own compensation in revenue. If a teacher 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 so if they are on salary.
Most studios have at least one teacher who is not hitting that threshold. 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. This is a non-revenue earning role so you can’t use the same benchmark, but in many studios of a certain size, it’s indispensable for smooth operations.
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 at least a 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 gut-wrenching, borderline humiliating and calls into question every dream I’ve had as a studio owner. It’s also the most grueling-yet-necessary work I provide for my coaching clients. There is no single lever. But there are specific moves, in a specific order, that bring the number back to range without gutting the team.
What’s coming
This is the first of two articles on payroll. In two weeks, paid subscribers will receive a diagnostic calculator that calculates your ratio across all three buckets, benchmarks your number against the thresholds I use with coaching clients and shows you specifically where the pressure is coming from.
If you want to run the math now, it is straightforward: add up everything you paid in instructor payroll, admin payroll and your own compensation last month. Divide by last month’s gross revenue. That percentage is where you stand.
Paid subscribers can upgrade below. The calculator goes out June 12.
Amanda
P.S. If you just opened a studio and work solo, this isn’t your math today. But I have something coming for you in Issue 6.