My studio’s payroll ceiling is 40% of gross revenue. Too much beyond that and I feel the squeeze every pay period. Too far below it, and my team is most certainly undervalued. So there’s a sweet spot. 40% is mine.
I outlined my basic approach to calculating this percentage in a previous issue (Fully Staff. Still Squeezed).
But of course the devil is in the details. So here are the specific steps I take to calculating my payroll ratio.
Gather the following using an average across a period of time, like a quarter or previous year.
Gross revenue: Total monthly income from all services before any expenses. Use an average across three or more recent months for a more stable read.
Payroll: Total payroll for teachers, front desk and yourself, whether W-2 or 1099. Include fees and taxes.
Operating expenses: Add up monthly lease plus utilities, insurance, software, supplies, merchant fees and anything else that runs the business month to month.
To find your payroll ratio, divide your total payroll by your gross revenue.
(Paid subscribers, see my calculator below this article to find your payroll ratio, operating margin and profit margin against each threshold.)
When looking at payroll ratios, I measure against four thresholds.
Under 30%: A ratio this low may mean you are undervaluing your staff, not paying yourself or both.
30% to 40%: Ideal city. The business has margin and the payroll is not driving the decisions.
40% to 50%: This is a dangerous range as revenue growth alone isn’t likely to fix it.
Above 50%: This is red flag territory and usually requires a combination of structural changes across the business.
These are just guides. No one studio is perfect. But if you’re way upside down and teetering toward the 50% mark, there is some work to do.
In my coaching practice, I have assisted studio owners with restructuring payroll. So it’s possible! Yes it’s a terrifying notion, but when it’s needed, it’s needed.
One of the most effective structural moves I have used with studios in the 40%+ arena involves how teachers are classified and compensated. Reclassifying instructors is more nuanced than a pay reduction and more durable in practice. It is also the most complex piece of this conversation.
I’ll cover that in an upcoming article.
Until then, take a peek at your payroll ratio and let me know what you find.
-Amanda
