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

Costs associated with cost of labor are a meaningful part of expenses for any kind of business. In some labor intensive areas of business which require qualified personnel such spendings may amount to as much as 50% of all costs. On average this figure may be in between 15 to 30 percent.

As a business grows, it entails growth of agreed wages and salaries. it is exactly at this moment when inefficiency and unjustified spendings on payroll may emerge. Expansion of staff, along with the increasing complexity of business processes requires an individual detailed payroll strategy.

Considering the meaningful share a payroll takes up within the structure of business costs, an inefficient one may adversely affect any business.
A payroll leakage is a general idea describing financial loss from incorrect organization of resolving tasks associated with the payroll. In this blog we analyze the basic causes of such losses, and ways to minimize payroll leakage within your business.

What is payroll leakage?

Payroll leakage relates to everything leading loss of income or unexpected costs in the field of labor. The cause of this may be different factors, such as badly organized personnel management systems, inefficient business processes, and inadequate accounting policies in relation to reality.

From our experience in this field, we came to know the general tendency. For companies slow in adoption of new personnel management technology, payroll leak is greater. Companies actively utilizing technology and process automation are in a much better position to minimize loss from payroll leakage.

How can failure to employ technology can lead to payroll leakage?

Let us name a few examples which occur most often.

Human error. Simple table editors, such as Microsoft Excel are still being widely used to manage the payroll. As a person operates such software, one inputs data and checks it manually. This process requires a lot of time, and does not exclude human error. It is difficult to uncover such errors without some very specific software.
Outdated software. In order to minimize business losses it is important to continuously analyze and plan the employee payroll. Lots of usual yet outdated pieces of software cannot associate a large number of data units and create forecasts in form of diagrams. This process is vital for making decisions to plan the payroll.
Timekeeping, accounting, and attendance monitoring errors. For example, as in when an employee keeps track of one’s overtime. Whether in error, or intentionally, responsible employees may add additional hours when working overtime, which then leads to increased expenditure.
Non-compliance of software with the requirements of law. International companies must work in accordance with their country of operation. Non-compliance may lead to considerable financial loss as fines, employee compensation, legal expenses and attorney fees.
Absence of instrumentation for accounting for foreign exchange movement. When executing payment of salary in different currencies, there is a possibility for unplanned loss and payment errors.

How can we minimize payroll leakage?

Minimizing payroll leakage implies a number of obvious gains, such as release of liquid funds, simplification of business expansion and scaling, and mitigation of negative effects associated with non-compliance with the law.

Such a task is not an easy one. Payroll management is still often being done manually. A key moment in how to solve the problem of process optimization is the use of technology capable of solving a number of various tasks:

Timely introduce various changes to correct errors causing loss;
Put together and analyze data which will enable making better decisions to minimize payroll leak in the future.
Program regular checks related to payroll management to detect all data errors.
Establish the necessary limits to detect excess spendings and run a check.
Simplify audits and checks by setting report generation in accordance with certain requirements.
Technology enables such a payroll process to be set up in accordance with the law of a specific country, while avoiding all financial and reputational loss coming from breaking the law.

Conclusion

Nowadays, advanced technology enables a significant reduction in payroll leakage. However, implementation of such technology is not always feasible due to complexity of software. When this is the case, an optimum solution would be an outsourcing model. Larger companies employ a third party to guarantee a weighted, and effective process of payroll management. An outsourcing company calculates the payroll con full compliance with the law, predictable spending, a structured and transparent billing.
Payroll leakage, as a form of loss, should be a thing of the past, since there is technology to solve this problem. Working with a large outsourcing company helps avoid difficulties associated with technology implementation and ensure continuous support.

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