What is Payroll Leakage, and How Can You Avoid It?

Stuart Steinke | Senior Business Development Manager, CloudPay

Payroll is a significant cost for every type of business. Typically, payroll will consume between 15% and 30% of an organization’s gross revenue, but this can rise to as much as 50% in businesses and industries that are more labor-intensive.

This means that when businesses grow and become more complex, payroll grows with them. And this is where inefficiencies and wastage can start to creep in, making payroll more challenging and risky to fulfill, and potentially more costly to execute than it really needs to be. Given the proportion of revenue payroll represents, these spiraling costs can do a great deal of damage to any business’s bottom line.

‘Payroll leakage’ is the catch-all term that relates to these inefficiencies, and in this blog, we’ll take a look at the root causes, and what you can do to minimize payroll leakage in your company.

What is payroll leakage?

Payroll leakage refers to anything that leads to revenue being lost or unexpected spending having to be made as a result of labor-related activity. This can come from a number of different areas, such as workforce management systems that haven’t been configured correctly, inefficient processes, and differences between workplace policies and what happens in day-to-day reality.

In our experience, payroll leakage tends to be higher in businesses that have been relatively slow in adopting workforce-related technologies. As you’ll discover later in this blog, those who have been proactive in using technology and automation generally find it far easier to minimize payroll leakage across the board.

Where is payroll leakage usually found?

To be more specific, there are a number of specific areas where a lack of technology can lead to payroll leakage, including:

• Manual errors: many businesses still use applications like Microsoft Excel to manage their payroll, with all data being inputted and validated manually. Not only is this extremely time-consuming, but it’s prone to human errors which are hard to detect without the use of automated software

• Outdated software: older solutions aren’t capable of tracking multiple payroll metrics and generating predictive charts, which are vital for delivering the insights that help payroll teams make the most efficient decisions

• Timesheet data errors: employees working overtime may add extra hours to their timesheet so that they can be paid for them. However, in a highly manual process, there is often little to stop them adding extra hours to the timesheet (either by accident or on purpose) and bloating the workforce budget as a result

• Compliance inconsistencies: international businesses must stay compliant with regulations in every territory they operate in, which can vary substantially and be prone to regular change. The penalties for failing to do so can be severe, as well as incurring audit and legal costs

• Foreign exchange: fluctuations in exchange rates, commission and the burden of admin can all lead to errors being made in payments that cross currencies, leading to extra payments needing to be made

How can you avoid payroll leakage?

The benefits of minimizing payroll leakage are clear: freeing up capital that can be put to better use in other parts of your business, simplifying expansion and crisis management, and ensuring no issues arise from a lack of compliance.

Ensuring that is achieved is extremely difficult when payroll processes are still largely manual, so embracing technology and automation is essential because it can help you:

• Make operational changes that cut out the errors that generate costs

• Produce data that can help you make good decisions that minimize leakage in the future

• Create validations within payroll processes that flag up any data inconsistencies

• Ensure limits and checks are rigorously enforced, so that overspending and unnecessary expenditure are reined in

• Simplify audits and inspections by making it easier to configure reports to whatever is required

• Adhere to country-specific employment laws and avoid any legal, financial or reputational damage that can be caused by breaking them

In summary

The technology involved in achieving low levels of payroll leakage is highly advanced, and that can make it impractical or unviable to implement in-house. Many larger organizations instead turn towards an outsourcing model, where an expert third party ensures that payroll never fails. Furthermore, it delivers predictability around payroll costs through structured, transparent billing.

In this day and age, there really is no excuse for payroll leakage, as the solutions are there to stop it from happening in every organization. Working with a third party, however, can help break down barriers around implementation.

With real-time visibility of global payroll, and the ability to track performance and compliance requirements, CloudPay’s global payroll solution is ideal for cutting out payroll leakage. Find out more on how it works here, then contact the team to discuss your specific use cases.

Stuart Steinke | Senior Business Development Manager, CloudPay