Benefitting Break-Even Point (BEP) in Payroll Services

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Tactical business decisions and break-even analysis (used to examine the relation between the fixed cost, variable cost, and revenue) run hand-in-hand that impact a business’ profitability, and help in calculating costs, budgeting, setting targets, and computing margin of safety. The sensitive and scenario analysis is the definite element of Break-Even Analysis to perform required financial modelling for the better future of the business. But, do you know reducing costs is a key factor in lowering the break-even point itself

Profitability protection during a recession

Variable costs rise and fall according to changes in sales, but have you ever wondered why certain companies hold better than others during a recession?

In today’s market world, almost every business is less able to withstand a drop in sales amidst mounting economic uncertainty (recession), and is required to take sensitive decisions towards an alternative route to sustain themselves in such testing times, like shortened weekends, unpaid leave of absence, temporary salary reductions, etc. that can create a bleak work environment.

To emerge stronger, there needs to be a solution that is at the least unperturbed by the ups and downs of the market. For instance, the benefits of Outsourcing Financial & Accounting Services are ‘recession proof’ with its cost-effectiveness, and elimination of over-workload for employees. These are the time-tested solutions that most businesses can use to limit the consequences of a recession.

Profitability protection creates armour for a business during a recession. Ask yourself a question: “Whether my business is achieving a competitive advantage by insourcing the fixed costs?”

Cost structure configuration is a“tool” that one can use to
limit the consequences of the financial crisis on their profitability.

Avoiding fixed costs from ‘cost structure configuration system’ by converting them into variable costs through outsourcing helps vast majority of businesses to achieve a break-even point with less of a financial cushion, more of market power, and gaining leverage within their industry. These enhance flexibility, scalability, and efficiency by delegating accounting responsibilities and tasks, for example, payroll services.

Payroll services: The set in-house break-even is more than outsourcing

To focus more on core competencies of business, long-term strategic investments, and operational cost savings, with outsourcing, most businesses tend to outperform, and lower their break-even point by reaching out to outsourced service providers for time-consuming processes like payroll services. By doing so, the employees can conveniently save their time and efforts in managing the finance operations, by taking due care of on-time taxes and salary disbursements, which helps in avoiding financial glitches and legal penalties.

Onsite costs vs Offsite costs

Adopting variable costs is beneficial in many ways. And you can take it to the next level by providing quality services that deliver high value to the customer. At present, every business choice comes with its own calculation, to make error-free decisions of F&A Outsourcing. Let’s go through the best ‘first step’ towards Outsourcing Financial & Accounting Services, and see how to determine accurate cost analysis that can be implied to the finance department, along with weighing it’s benefits:

It is important to analyse a realistic crossover point (rate or level of return of two comparable projects that have the same net present value) by identifying and considering:

Outsourcing costs for services like payroll, bookkeeping, junior credit control, reporting, onshore advisor/support, setup and training, accounts and payroll software, and account management costs
In-house costs (fixed costs) like infrastructure, maintenance, utility, training, finance professionals, and other software costs

Example

The difference between costs of Finance and Accounting outsourcing and in-house team:

Fig. 1 states how the overall processes and expenses of the business become less expensive when they are outsourced, rather than with an in-house team.

Benefits of outsourcing payroll services in relation to contribution margin and break-even point

Contribution Margin Ratio = (Net Sales Revenue - Variable Costs)/Sales Revenue
Break-Even Point = Total Fixed Costs ÷ Contribution Margin Ratio

The increase in the fixed costs diminishes the average contribution margin ratio, and influences the operating profit that can be achieved with sound management decisions (refer to Fig. 2).

Besides, the payroll management system is a greater hidden cost. It is a critical aspect, and a major challenge faced by many businesses. According to Deloitte’s Payroll Benchmarking report, a key performance indicator of payroll performance is the number of errors and days it takes to resolve these errors. The efforts made on payroll corrections take up valuable time that could be spent on strategic initiatives.

For instance, while viewing the costs of the payroll management process, businesses often view only an ‘as is’ figure. It is typically derived from the costs that are readily available and accessible, like headcount, software licenses, communication costs, overpayments because of payroll errors, costs of maintenance and poor performance, manual reporting overheads, and IT security compliance.

Finance and Accounting Outsourcing helps to avoid these finance management challenges by providing the key benefits of:

On-time payroll and compliance support with accuracy
Real-time online access to your payroll activities
Advance and unified technology payroll and account software

A positive ROI with outsourcing payroll services

The most crucial benefit of outsourcing payroll services is freeing up your employees to focus on business tasks, and complete other core responsibilities, like improving cash flows and increasing revenue opportunities, instead of spending time on prolonged payroll management. Sometimes, due to workload, there is a high possibility of payroll errors and other grave mistakes, which can lead to expensive compliance failure, resulting in legal penalties and lawsuits.

Conclusion

Outsourcing payroll services can help you to quickly and accurately complete tasks like collecting timesheets and other data for payroll processes, identifying and resolving payroll errors and ensuring to file payroll taxes on time for a positive ROI.

Want to go beyond ‘lift and shift’ business by lowering your break-even point and increasing ROI? Contact IMS Decimal today to find out how outsourcing can change your business for the better.

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