MBA1612 How Much You Should Spend on Payroll + Free Ride Friday

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Hey, today is Free Ride Friday so make sure you hang on to the end of the episode to hear who won this week's Free Ride. Every Friday we give away a lifetime membership to one of our programs. We're giving away easy course, our 30 day course on how to build your own online course. It retails for $500 over at EasyCourse co. Or you can win it for free. Just leave us an iTunes rating and review and you enter our weekly random draw we call Free Ride Friday and then just listen in on Friday just like today to see if you won. It's that simple. It's our way to say thanks for showing us love on itunes. All right, let's jump into today's episode. Hey. Welcome to the $100 MBA Show Business Building Goodness delivered every single day with our daily 10 minute business lessons for the real world. I'm your host, your coach, your teacher Omar Zenholm. I'm also the co founder of the $100 MBA, a complete business training and community online. And in today's episode you will learn how much money should you spend on your payroll. I get asked this question quite often. How much in terms of a percentage of my outgoing costs should I be using to pay for employees, to pay for our team members versus maybe suppliers or vendors or Other costs involved in running a business. This is going to depend on a couple of factors that I want to share with you in today's episode. The nature of your business, the nature of your product. But regardless of your business, I'm going to give you an easy rule to follow to know. How much should you value in terms of money spent on your business payroll? How much should you be spending? Are you spending enough? Are you spending too much? Are you overstaffed, understaffed? Or maybe you just don't have enough high quality, valuable players on your team to really make a difference in your business? Payroll is something that you really need to look at, especially as you start scaling your team beyond yourself. And it gets more and more interesting when you go from 10 to 20 to 30 to 50 to 100 employees. And there's so much to discuss. So let's get into it. Let's get down to business. When you're just getting started with your business, payroll is probably the last thing you think about, because the only person you're really paying is yourself. And when you're paying one person, it's often not a big part of your expenses. It's probably a fraction or a small fraction of the other expenses involved in running your business. But as your team expands, as it scales, as it grows, you're going to need to make more hires, more significant hires, and payroll will become more of a factor in your expenses. How much more? That's what we discuss in today's episode. So the first thing we want to nail down is the nature of your business. Depending on your business and your product, your service, whatever you deliver to your customers, your strategy for how much you should be spending on payroll will differ. For example, if what you deliver to your customers is a service or a product that's created by your employees, by your team, then payroll is going to be a big factor. It's going to be something that you should probably see as the majority of your expenses at the start. First, let's establish what type of business you run, because this is going to be a guiding factor on how much money or how much of our expenses we should be paying towards payroll. So if your business is is where your employees, your team actually produce the product or deliver the service, then payroll is going to be a big deal in your business. For example, if you are a graphic design team and you have a team of designers that deliver creative designs to your clients, your product is the imagination, the talents, the creativity of your team. That's it. You're paying these people to Deliver the product. Really, that's your product. Your people are your product. Really the same thing goes if you run a software company, your team is what allows you to deliver that product. The engineering, the delivery of the code, obviously the customer support and service people on the team to market it, all that kind of stuff. Without the people on the team, it's going to be hard for you to sustain the business. One kind of way to figure out if you're one of these companies is what if everybody on your team beside yourself, quit tomorrow? They just quit and they're not coming back and you will not have anybody else on your team for the next 90 days. Will your business be able to sustain itself? Most likely not. If you're in one of these categories. If your business is creating the product or service or you're a service based business delivering an expectation to clients. I'm talking about your business would just not operate no way around it. Versus let's say I sell a physical product. Let's say I sell designer ties in my local shop. Somebody creates a supplier, creates these ties for me. They ship them to me, I sell them in my shop. Now if everybody on my team, like my employees, my staff, quit, it would be horrible, of course, but I can probably walk into the store and I can open it up, I can be the cashier. It would be really bad service, slow service. I wouldn't be able to handle all the customers, but I can kind of get the business going and it won't be the same and, but I could still run the business in a very, very, you know, kind of slow and poor fashion. Why? Because my product is not created by the employees. It's created by a supplier, somebody else overseas, something like that, that's somebody who's providing this product. I have a product, I have a customer. If I can just put that, you know, that, that product in front of the customer and collect money, I have a business. Businesses like these are really not as reliant on, on payroll or the talent on the team as like a software company or service based business. They still need staff members. They cannot survive without it for a very long time. But it's not as reliant. So therefore the payroll is going to be one of the expenses on their profit and loss sheet. But it's not the biggest expense. Their biggest expense will be the actual price of the product, maybe the rent for their actual store, maybe packaging, all that kind of stuff. These are things they have to buy from suppliers and suppliers will probably be their number one cost. For example, if you look at a company like Walmart, Walmart doesn't produce all its products. It actually buys it from other suppliers, other manufacturers. They ship it to their stores or actually their warehouses and their warehouse ships this to the stores and then from there they sell a product in the stores. Of course, they need employees to run the stores. Of course they need corporate management, they need all that kind of stuff. And this is a huge behemoth company. So obviously they can't run the company without employees. But their biggest cost is not their employees. Their biggest cost is actually the product that they have to pay for and then resell later. Their biggest costs are probably real estate, the rent for these huge stores. So payroll is not a big factor. And the big difference here is they don't create their own products and they're not a service based business. So if you are a business that is creating their own product, or you're a service based business, photographer, artist, a car wash, right, where it requires people to deliver the actual thing you're giving the customers, this is something you really need to invest in your payroll. You need to get the best people for the job. No matter what you're delivering, this is your best investment. Great talent, because great people will create a great product. Great people will create a great experience for your customers. Great people will allow you to market the product and get it in front of new people. So as you can see, talent is important. So therefore, if I think it's important, if I think it's something that is going to allow me to succeed, I can't just think it. I got to act upon it, I got to invest in it. I need to put money behind that idea. So, for example, our software company, Webinar Ninja, has a lot of expenses like server costs and maintenance and marketing expenses like running Facebook ads. But our biggest expense by far is our payroll, what we pay our staff. Because our team allows us to deliver an amazing product. They create the product, they deliver it, they support it, they sustain it, they service it. So this tells me that if this is so important, whenever we make profit and whenever we make money, we need to reinvest in what really helps build the business. And that's the talent. That means making new hires. That means maybe incentivizing our team members, having some sort of increments or any kind of incentivization for performance in our team. The point is you need to really take care of your talent and the majority of your expenses should be payroll. So if you're that type of business, in my opinion, at least 60% of all your expenses should be from payroll because this is directly investing into the company and the product you're creating. With a better product, it'll be easier to market, it'll be easier to convert, it'll be easier to bring in customers. And by the way, part of your payroll is marketing, is hiring people to make sure they market your business. Now, if you're on the other side of the fence where your product is not created or delivered by your staff, my opinion is that around 40% should be payroll. 60 on other factors in your business because this really matters, your product and what you actually give your customer. If you're listening, you're like, hey, my business is a little bit different. It's not that simple. My advice to you is don't overcomplicate it. The best thing to do is ask a business owner that has a similar business, maybe not a competitor, but has a similar type of business, same kind of expenses in the same areas, and ask them what percentage of your expenses do you dedicate to payroll? And they'll be able to tell you pretty much off the top of their head if they are familiar with the profit and loss sheet. And you can use that as a gauge as well. But for the most part, what I described today is usually the scenario you're going to fall under whether you create the product or the product is already created and you're just delivering that product via employees.

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To wrap up today's lesson. Your talent is so important. The people that run your business, a great team makes a great company. The that delivers a great product to happy customers. Even if your product is not produced by your employees and you get suppliers like the Walmart example or my designer ties, right? Remember that business is an experience, right? Your customers have an experience. It's not just the tie they're buying, they're buying the experience of buying the tie, the service they're getting at the store, all that kind of stuff. So always stay within your budget and don't grow and expand and try to go cheap with your employees. A lot of people do this. Like I'll open another branch, I'll expand, I'll just get less experienced staff and pay people less. You're gonna suffer. Just because it's not one of the biggest expenses, it doesn't mean it doesn't have importance. Only expand when you can deliver great quality and deliver your product with great service. Thank you so much for listening to the $100 MBA show. If you love what you hear, hit subscribe right now. Today's episode's not over though, because it's Free Ride Friday. Let's see who won this week's Free Ride. And the winner is Super Mikey. Super Mikey says Super Practical Tips. Five stars. I'm a huge fan of the show. The choices of Omar's topics are excellent and really helpful. He helps me a lot. Thank you, Super Mikey. You are our Freeride Friday winner. Make sure you email me over at omar100mba.net so we can hook you up with the free ride to Ezcourse, our 30 day course on how to build your own online course. It retails for $500 over at EasyCourse Co, but it's yours for free because you won Free Friday. If you want to win a free ride as well, just leave us an iTunes rating and review and you enter our weekly random draw we call Free Ride Friday. It's our way to say thanks for showing us love on itunes. Before I go, I want to leave you with this. When it comes to hiring more and more team members and adding more to your payroll, it's really important for you to pace yourself and to hire at a pace you're comfortable with. Because remember, you want to make sure that you can continue to pay these people consistently and during the ups and downs of your business. These are mouths you're feeding. In some ways, it's a very simplistic term, but you're helping a lot of people sustain their life and their family and all that kind of stuff. So you want to make sure you can be consistent as possible and never miss out on being able to pay them. Go at a pace that you're comfortable with and make sure you account for the fact that sometimes sales will be up, but not always. Thank you so much for listening and I'll check you in Monday's episode. I'll see you then. Take care.

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