February 21, 2019

You Asked, We Answered: Calculating Payroll Budget & Strategies for Payroll Reduction

green background, Scissors cut strings above word COSTSQuestion:

Our practice is working on a new budget. We want to reduce payroll costs to 23 percent of collections. I’m not sure where to start! What should I be factoring in as a “payroll cost” (continuing education, uniforms)? And what are the best strategies for reducing payroll?


This is a complicated question that actually touches on many different areas of practice management, including accounting, strategic planning, and legal compliance.  Let’s break it down together.

Set payroll goals that are customized for your office.  

Many of our members hear about payroll goals through industry associations, consultants, or colleagues. Understand that while 23 percent may be a goal that works for other practices, it may not be the right number for you. Ensure you know why you are choosing that as a financial goal, and be able to justify it.

For example, if your doctor is a specialist with a small team and high profit margins, their cost of labor cannot be compared to a growing general dental practice. In the same token, a practice located in a high-demand area may be able to charge 18 percent more than you are able to charge for your services, making their payroll costs equate to, overall, a lower percentage of their collections.

In a similar vein, if you are a growing business, your payroll costs may need to be adjusted due to the fact that hiring must often occur ahead of the “need” curve. If you are adding a treatment day with the goal to increase the number of patients you see, you often need to staff that treatment day before every available appointment is filled, and this can throw off your numbers.

Don’t forget to include how you pay yourself.

Finally–and perhaps most importantly–many owners don’t consider how they themselves are getting paid when it comes to setting payroll goals. Owners often pay themselves a nominal salary through payroll, while obtaining most of their income through profits coming back to them through the business.  

As owners and managers, you want to ensure your goals for profitability align with those you are setting for payroll. This is perhaps especially true when your staff consists of those who are paid in a variable manner, like an associate doctor who is being paid a percentage of production.

Your takeaway here should be that your target figure needs to be a realistic number that fits your office, and your goals. We recommend you do a “one year lookback” on your payroll costs, itemizing the source of each thing contributing to your payroll costs. If your historical value is around 28 percent, for instance, you have a much better idea of what a realistic goal is for you and how you can achieve that goal.

Know what you are factoring into “payroll costs.”

If you’re going to be pulling your historical payroll costs, you need to know what you’re looking for, right?

Generally, your payroll costs are going to consist of all things associated with the cost of employees. But what you need to be doing is ensuring you are measuring this consistently and accurately over time.

The obvious big-ticket item here is gross wages; and with wages go payroll taxes, benefits packages, unemployment taxes, and things like workers’ compensation insurance. If you pay someone to process payroll each year, that cost should also be considered in your overall payroll budget (check out CEDR’s partner PayDay, Inc. for these services).

But what about related expenses?

You specifically asked about continuing education. As HR nerds, we can’t help but geek-out for a moment to tease out the fact that if these are non-exempt employees (those subject to minimum wage and overtime requirements), federal law requires you to count the hours associated with training as hours worked (meaning these would be in gross wages above).  There are narrow exceptions to this rule, and you can read more about this concept in our Trainer on Training and Travel Time. For continuing education expenses that are outside of the wages you are paying to your employees, like course fees, airline tickets, meals, lodging, and the like, you can categorize these costs outside of your “payroll”, and you should work with your accountant or tax professional for the best way to factor those items in as a business expense. Most organizations do exclude non-hourly costs of continuing education and training from “payroll.”

Be strategic about reducing payroll costs.

When you begin to set a target for your percentage of cost of labor, you begin to see everything that goes into the cost of paying your team; calling to mind the old adage: What you measure, you pay attention to. When you look at your numbers in this way, you will see that there are only two ways to change your percentage: (1) Increase income ahead of adding labor expenses; or (2) Reduce the total number of hours worked.

Many managers faced with the need to reduce payroll are tempted by the siren’s call of stripping down benefits, perhaps offering no paid time off or cramming your patient schedules as full as possible. These strategies may reduce payroll in the short term, but can backfire in the form of high turnover and low morale.

Sustainable strategies for reducing payroll costs involve things like auditing for unneeded overtime and talking to your staff about scheduling expectations. If you have a staff who tends to arrive early every day and stay late even after patient care has finished, you may reduce the total number of hours worked by simply communicating to your team that you expect them to clock out as soon as their productive work is finished.  

Similar efficiencies may be found in maximizing patient treatment times that are most productive. If you find that your patient population is always canceling Wednesday afternoon appointments, but everyone shows up on Saturday mornings, you may shift your schedule to maximize efficiency. This strategy both increases your income while reducing the total number of hours worked, which results in reduction your overall payroll costs.


Friendly Disclaimer: This information is general in nature and is not intended to provide legal advice or replace individual guidance about a specific issue with an attorney or HR expert. The information on this page is general human resources guidance that is believed to be current as of the date of publication. Note that CEDR is not a law firm, and as the law is always changing, you should consult with a qualified attorney or HR expert who is familiar with all of the facts of your situation before making a decision about any human resources or employment law matter.

Leave a Reply

Please note: CEDR Solutions specializes in providing expert HR support to owners and operators of independently owned medical and dental practices.