For practices · The economics of payroll

Payroll is the loss leader in most small practices

Not every practice, and not every client. But often enough that it is worth doing the sum properly rather than assuming, because most firms have never actually worked out what their payroll service earns.

Do the sum on one client

Pick a payroll client with five employees, paid monthly. Now count everything, not just the run.

Collecting the changes each month. Chasing the ones that do not arrive. Entering them. Running it. Checking it before it goes. Issuing payslips. Filing the FPS on time. Answering the query that follows. Setting up a starter, processing a leaver, dealing with a pension enrolment, handling one tax code notice.

Spread across the year, most firms land between forty minutes and an hour and a half a month for a client of that size. Now price that at what you would charge for the advisory work the same person could have been doing.

Compare it with what you actually bill for payroll. For a lot of practices the gap is uncomfortable.

Why it stays underpriced

Because payroll was rarely sold. It was agreed to. A good client asked, somebody said yes as a favour, and a favour is difficult to reprice three years later.

Because the price anchors low. Clients see per-payslip figures advertised online and assume that is the market, without any of the query handling, the corrections or the pension work that a real service includes.

And because the cost is hidden. Payroll rarely has its own line in a practice's numbers. It is absorbed into general staff time, so it never shows up as a loss, it just quietly makes everything else slightly less profitable.

The cost nobody counts

Interruption. Payroll arrives on fixed dates that do not care what else is due that week. A year-end file that would have taken a clean day takes two when it is broken up by three payroll queries.

Then there is key-person risk. If one person runs payroll, the practice carries an exposure that does not appear anywhere in the accounts until they resign.

And there is the error tail. A payroll mistake is not like a bookkeeping mistake. It is somebody's wages, it is noticed immediately, and it is fixed at your cost.

The argument for keeping it anyway

It is a real argument and it deserves stating. Payroll is monthly contact. It is twelve conversations a year with a client you would otherwise speak to twice. It is the earliest warning you get that a client is struggling, because staff numbers move before the accounts do. And it makes you harder to replace.

That is worth something. It may well be worth more than the margin. But you should be choosing to subsidise it, not discovering later that you were.

Three ways out, and one is not real

Raise the price to what the work costs. Correct, and harder than it sounds when the client has paid the same figure for six years.

Drop the service. Rarely chosen, because of everything in the paragraph above.

Keep the client and stop doing the work. The payroll runs under your brand, your client sees no change, and you keep the relationship and the fee without the time or the key-person risk.

The option that is not real is carrying on and hoping the volume improves the margin. It does not. Payroll admin scales almost linearly, which is precisely why it does not behave like the rest of your work.

Where we come into it

We run payroll wholesale for practices, under their brand, at rates that leave a margin for the practice. The partners page has the numbers. But do the sum on your own client first, because the sum is the argument, and it is your sum rather than ours.