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How to Audit Your Payroll

Your people are a vital part of your business. Employees are the grease on the wheels: they make all business operations possible. And for most studios, employees are also the largest expense.

Compensating great employees properly for their work is a necessity. As I wrote about in Building a Budget (INSight™ Fall 2020), it is important to analyze and set a reasonable expense to cover the cost of the people who work for you. That way, with a good handle on your expenses for employee compensation, it’s totally possible to keep your great employees happy while also keeping your business bottom line healthy and strong.

Let’s talk about how to “audit” your payroll—or, in other words, how to analyze and improve it. I will help you:

  • set the budget for your payroll expense
  • track its progress
  • repair problems

Let’s get started!

What does my staff cost?

Prior to hiring or before the start of a new season (or any time you are seeking a fresh start with your finances!), take time to project your business’ expenses for staff wages. To keep this simple, use the worksheet here to list out who works for you and their earnings. Do this for teaching staff, front desk staff, and upper management/leadership staff. I will focus on the teaching and desk staff as an example.

For teaching staff, calculate the payroll for each month. Identify each team member, how many classes they teach in the month, and the rate they earn. Then do the same for the desk staff by identifying how many hours they work each month and the wage they earn for those hours. This will give you a budget.

Compare that monthly expense to the amount of monthly revenue the studio brings in. If the percentage of expense compared to revenue looks too high (greater than 25 to 30 percent), perhaps you can consider filling some classes or desk shifts with someone with a lower pay rate. This is the first step to managing your payroll and taking control of this expense. As you problem-solve a high percentage, try plugging in different scenarios: analyze the expense of different people in different positions. As dance studio owners, we are often guilty of placing people into roles haphazardly, either because of the schedule they request or just to fill gaps in staffing. This budgeting exercise is imperative to understanding your overall payroll expense.

How am I doing?

Once you set your staffing schedule and team members are in place, it’s easy to get busy with other parts of the business—but don’t forget to track your payroll budget progress! This is the step that helps you proactively find problems. The faster you find them, the easier it is to fix them.

Each month, evaluate how your monthly payroll expense compares to the budget you originally set. (See worksheet example.) Your payroll system’s monthly report will show each employee and how much they were paid. A “payroll detail” report will help you compare the actual gross pay amount for each employee with the budgeted pay amount.

What if the numbers don’t add up?

Very rarely will the above exercise lead to an exact match—what you paid for payroll that month matched your original budget for payroll that month—with no discrepancies. When the numbers don’t match, it is essential that you uncover why. What happened and how can it be fixed?

Review the payroll report line by line (by employee) and highlight any employee whose numbers don’t match. Consider the following possibilities:

  • Someone teaches fewer classes because they had a substitute, totaling less pay for the regular teacher’s budget and more for the substitute’s budget.
  • Someone teaches fewer classes because they had a substitute, but erroneously records that they taught the class. The substitute correctly records those hours, leading to duplicate pay (to the teacher and to the sub) for those classes.
  • Someone worked unapproved administrative hours.
  • Someone taught additional private lessons.
  • You paid someone for a task or job that was necessary, but you forgot to include it in the original budget (such as extra private lessons or staff meetings).
  • A front desk worker stays later than their shift time allocation.

How do I fix this?

When you find that your payroll expense is over budget or in need of correction, there are steps you can take to make sure this financial hiccup isn’t compounded further, such as through continued overpayment or misunderstandings among your staff members. You’ve made it this far—don’t forget the crucial follow-through!

Repair suggestions:

  1. Have a candid conversation with the employee about the error. Educate them but do so with kindness. Speak clearly and stress the importance of accuracy in the future.
  2. Create a better system surrounding the error. For instance, if you have people duplicating class entries on their timesheets because a substitute records the class and the teacher does too, consider creating a Google form that the regular teacher has to fill out to identify their sub ahead of time. This way, at the time of payroll entry, you can cross-check for duplication.
  3. If you are over budget and need to reduce payroll expenses further, consider cutting shifts or replacing higher-wage teachers with lower-wage teachers in classes that don’t require the higher rate.
  4. Lastly, if you forget a necessary payroll item and only realize it once it happens, adjust the rest of your budget accordingly (reduce other areas of expense) to get your bottom line back in order.

Won’t this take a lot of time?

Yes, this takes time and attention, but if you stay on top of your payroll expense you will learn to manage it with finesse. When you implement these small steps and analyze them regularly, you will start to see trends. Use the knowledge of those trends to make necessary changes—and when needed, have those hard conversations with your employees. Once you have more control over this aspect of your business, your confidence will grow.

If you’re ready to dive deeper into analyzing the value of your salaried employees, teachers, or administrative staff, connect with me for one-on-one coaching by scheduling a private mentorship interview at www.girlplusconnect.com/grow. Gaining control of your finances will give you control of your goals. I’m cheering you on!

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