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Updated Nov 08, 2023

Can SMBs Balance Payroll Burden and Labor Demand?

Learn how to balance managing payroll burden in an inflationary economy and meeting labor demands to keep your business operational and profitable.

Rebecca Neubauer, contributing writer
Rebecca Neubauer , Business Operations Insider and Senior Writer
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Two areas that keep small business owners on their toes consistently is labor demand and payroll burden. With limited resources available, these two closely intertwined aspects require careful management so businesses can secure the right staff while keeping payroll costs manageable. As a small business owner, how do you find the proper balance between both demands? This article will explore strategies for optimizing your costs and profitability while ensuring you are able to recruit and hire top talent.

What is payroll burden? 

Payroll burden is the total cost that businesses incur by employing staff. Beyond just salary, this can include taxes, training, benefits and insurance. Payroll burden can be seen as both the direct and indirect payroll costs of employing workers.

Managing the payroll burden can be a major headache for small businesses. To maintain competitiveness and profitability, they must have a clear budget for their total workforce cost while still being able to serve their customers. 

TipTip
Looking for a tool that can help you track and manage payroll expenses? Consider our list of the best payroll software on the market, including our review of OnPay, which we named the best payroll platform for small businesses.

What is labor demand?

Labor demand estimates the number of employees a business needs to fulfill its goals. It can be based on factors such as seasonal variations or target productivity measures. Having the right staff with the right skill set is essential for small businesses to be successful and remain profitable. This means adequately meeting labor requirements while ensuring payroll costs are within budget.

How payroll burden and labor demand are in conflict

Small businesses are consistently one of the most important sources of jobs in the American economy. According to the United States Small Business Administration, small businesses created 10.5 million new jobs from 2000 to 2019

However, despite employing 46.8 percent of U.S. employees, small companies face difficulty filling their available roles due to increasingly competitive labor market conditions. Wages at small businesses can’t always match those offered by bigger enterprises easily. Additionally, healthcare costs remain an issue for businesses without substantial personnel budgets, making it difficult for smaller firms looking toward long-term employee engagement strategies.

“They have the need for workers — they just have a little bit harder time finding it,” said Marty Mucci, chairman of the board of directors at payroll and human resources (HR) company Paychex.

Small businesses need to offer competitive compensation packages to attract the best candidates. Unfortunately, this is in direct conflict with the goal of minimizing the payroll burden. It’s incumbent upon business owners, then, to find a happy medium in which they’re able to recruit and retain skilled new hires without breaking the bank.

Key TakeawayKey takeaway
Small businesses are looking to fill open positions, but they’re finding it difficult to hire in this economy. If you want to recruit the best employees, check out our guide on how to improve your hiring process.

How to balance payroll burden and labor demand

Balancing payroll burden and labor demand is about ensuring the cost to hire and retain staff is sustainable for your business’s budget while employing enough staff to meet your business’ needs. Small businesses can use the following strategies to balance payroll burden and labor demand:

  • Offer alternative financial incentives: Offering incentive packages, such as bonus structures, commissions or stock options, can help attract top talent without dramatically increasing wages. This way, employees have the opportunity to earn more money when they bring in more revenue.
  • Consider outsourcing: Depending on the specific skill sets needed, it might be more cost-effective to outsource certain tasks rather than hire full-time staff. For example, rather than maintaining a full HR department internally, you could outsource those functions to a professional employer organization (PEO). [Related: Check out our picks for best PEO services to learn more about how these companies can handle your HR functions.]
  • Invest in training and development: Providing employees with an opportunity to upgrade their skills can benefit the company as they become more efficient and productive. Encouraging professional development and providing opportunities can keep your most motivated employees engaged while improving their skills to benefit the company.
  • Leverage technology: Technology can help automate processes and reduce labor demand by removing the need for certain positions or increasing efficiency to allow fewer workers to manage a higher workload. For example, leveraging customer relationship management software and marketing automation together can help expedite workflows for sales and marketing professionals, increasing the amount they can accomplish and eliminating repetitive labor.

Small businesses must prioritize efficiency and resourcefulness when it comes to labor costs. Ensuring employees are well-trained and properly managed can help limit employee turnover rates. Limiting employee turnover reduces the amount of time and money a business must spend to attract, hire and train new candidates that, in turn, reduces payroll burden.

Consider the economic climate

It’s also important to consider current economic trends when making these decisions. For example, keeping an eye on inflation rates in today’s market is critical, as inflation can impact wages and other employee-related costs. 

Small businesses are feeling the squeeze even more in this economy due to increasing inflation. As the Consumer Price Index shows, inflation is causing significant increases in everyday costs like food and fuel. That means the average worker is seeking higher wages to afford the same consumer purchases as before. 

Given that two out of three business owners aren’t paying themselves due to inflation, it is obvious that small businesses are facing significant financial constraints when it comes to increasing salaries for their workers to match increasing inflation. Additionally, inflation can lead to minimum wage increases which will force some employers to increase payroll burden or reduce their staff to a level lower than optimal labor demand.

Did You Know?Did you know
Small businesses can prepare for a minimum wage hike by cutting expenses and streamlining spending, increasing prices in small increments and reducing operating hours to cushion the wage hike.

Balancing payroll budget and labor needs is key to success

Small businesses can remain competitive despite increased labor costs through careful planning and intentional hiring. Entrepreneurs should consider strategies, such as outsourcing, financial incentives, training and development investments and technology, to ensure their payroll burden remains manageable while also meeting labor needs. Planning ahead and anticipating hiring needs and related payroll expenses will help small businesses meet both labor demand and payroll budgets.

Rebecca Neubauer, contributing writer
Rebecca Neubauer , Business Operations Insider and Senior Writer
Rebecca Neubauer is a finance expert who became increasingly passionate about the subject while developing strategies to pay off $100,000 in student loan debt before opening her own small business. Neubauer now shares what she's learned with other entrepreneurs, breaking down complex business topics and teaching fellow business owners best practices for everyday operations and financial stability. Neubauer's business acumen and financial wisdom are apparent in her professional guidance, which has appeared in USA Today, Business Insider, GoBankingRates, Money.com, LendEDU and FinanceBuzz. She's provided advice on everything from the best billing software to how to calculate overtime, and especially enjoys working with small business owners in local communities.
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