Startups face significant challenges on their quests for growth. Changing resource levels, market trends, and customer preferences are some of the factors that can make or break a startup’s journey towards becoming a thriving enterprise.
An often overlooked area in this regard, payroll represents a company’s investment in its most significant resource: employees. The way a company structures and manages its payroll can either generate ROI and set it on the path to efficient growth or consign it to a state of overspending.
Regulatory concerns surrounding payroll can also hamper a startup’s growth. Read on as we explore proactive payroll management’s potential to leave a lasting impact on a startup’s growth curve – and how founders can intelligently design payroll processes to boost growth.
Experimenting with Compensation Structures
Compensation is a key factor in hiring and retaining talent. Startups face resource crunches, and getting the most out of payroll investments is critical. Typically, startups offer equity and cash compensation by default.
However, this structure doesn’t suit all startup founders or their employees. Equity options dilute the founder’s stake as a business grows, and board members will likely be unhappy with excessive dilution. Structuring vesting timelines and equity contracts is expensive and time-consuming, and often doesn’t address critical employee needs.
A company that practices good payroll data management can run analytics and draw compensation projections from it. It can modify its compensation structure and model the impact of novel solutions on cash flow.
For example, a startup can offer flexible work perks and invest more in tangible benefits like housing allowances or childcare compensation. Offering novel healthcare coverage plans to employees is also a tangible compensation benefit, instead of equity which carries significant risk for employees seeking a steady salary and security.
Proactively modeling the impact of these compensation structures will save founders equity and let employees know their company is on board with addressing their pressing needs. Startups can use their compensation structures to enact a cultural shift and inspire employees to produce more, generating more ROI from payroll.
Maximizing Budget Efficiencies
Every startup has to grow to fulfill its founders’ and board’s expectations. Hiring employees is the key to scalable growth, since no founder can do it all by themselves. However, how much money should founders allocate to different projects? Which skills should they prioritize when hiring?
For instance, should they hire more developers to support existing clients and build products or sales teams to generate more revenue? Budgeting processes are critical to answering these questions, and payroll data plays a critical role in modeling budgets.
Founders and their financial teams must project budgets and match them to their cash runways. These projections can provide an idea of how much they need to raise from investors and the structure of that funding. For example, debt funding might be a better option than equity, depending on the cash outflows the startup is experiencing.
Payroll data captures a significant chunk of expenses, both current and future. Workforce expansion plans must take payroll increases into account and give startups an idea of how efficient their budgets are.
For instance, developers might enhance product functionality but can’t directly generate revenue. Salespeople cannot satisfy current customers but can boost billings. To find the balance between these hires, founders must proactively model hiring options and measure ROI.
Expanding into different locations is also a factor when modeling growth. For instance, expanding to a new domestic location with a physical office might save a company payroll taxes compared to hiring an EOR in a foreign jurisdiction and using it to hire cheaper foreign labor.
Both options come with different financial considerations, and founders must take the time to model these types of scenarios to match expected costs and returns to the peculiarities of their niche. For example, hiring an offshore team might reduce costs but could lead to product release delays due to communication challenges.
Easing the Burden of Manual Calculation
Manual processes will almost certainly produce errors and are the source of plenty of startup payroll errors. Many startups either outsource payroll or run pay schedules on a spreadsheet. Both these options involve manual payroll processing that increases costs caused by payroll errors.
Investing in automation is the best way to eliminate costly payroll management snafus. While a payroll platform might seem like an expensive choice in the early stages, founders must prepare their company for growth and scaling.
By installing automated payroll processes early, startups can scale quickly, keep scaling costs low, and model growth efficiently.
If the cost of adopting an electronic solution is too high, startups must automate as much of their process as possible, so you can feel the difference when processes are efficient.
This method reduces ramp-up times when the company has resources available to invest in a platform. Typically, growing startups eventually pivot from using outsourced payroll providers to an electronic solution, and this switch disrupts payroll until ramp-up finishes. By proactively investing in automation upfront, startups can avoid switching costs and efficiently grow.
Payroll Management Is Critical
Startup success hinges on several factors, and payroll management is an often overlooked one. By streamlining payroll management early, founders can set the right foundation for growth and give their growth teams access to valuable data that assists in scaling and expansion.
