Why Payroll is Very Important for Startups?
Owning our own business is a dream come true for many of us. Over the past couple of years, the startup landscape in India has completely changed and, with it, has given rise to a new breed of entrepreneurs who are resilient and determined not only to ensure that their businesses withstand the test of time but also serve the greater good.
However, as a part of this esteemed cohort, I hope you are aware that running your own business arrives with a unique set of challenges, with one of them being, managing the payroll at your organization.
It is important that as a startup owner, you not only understand the need for payroll at your organization but also the greater impact it has on your overall business and thus, in today’s blog post, we will discuss the same in detail.
Without further ado, let’s get started.
What Is Payroll?
One of the first and most important aspects we need to understand is the essence of payroll, especially in the context of a startup.
In simple terms, payroll can be understood as an umbrella process which captures the various stages which result in your employees receiving their paycheck on time in regular intervals. Irrespective of the compensation structure you follow at your organization and the frequency at which the same is disbursed to your employees, understanding the finer workings of payroll is crucial in accurately ensuring its efficiency.
The term payroll essentially refers to three main stages as shared below.
- Defining the payroll structure at your organization
- Accurately calculating and disbursing the payroll of each of your employees
- Performing post payroll operations such as tax filings, compliance etc
Let us understand each of these in detail.
The payroll process at your organization should always begin with you defining the payroll policy. Essentially the payroll policy defines the guidelines, which will help you navigate not only the compensation you offer to employees but also the compliance and regulatory guidelines your organization needs to follow.
The payroll policy can differ between organizations; however, at its essence, it captures the following criteria.
- Understanding and accurately defining the compensation structure of each of your employees
- Understanding the various rules and regulations of the geography, you operate in, both at the state as well as central level
- Defining the various compliances and post payroll operations you need to conduct at regular intervals.
While at first glance, the payroll policy might appear to be complicated, by hiring the assistance of an expert accountant or a cloud based payroll management system, you can seamlessly form a payroll policy and further use it to navigate the entire payroll process.
Calculating Employee Compensations
Once your organization’s payroll policy is in place, the next step of the process is to accurately arrive at the compensation each of your employees is entitled to. While it might appear that it is as simple as transferring the desired amount directly to your employee’s bank account, in reality, there are several different steps involved in this process.
Shared below are some of the most significant.
- Collecting Employee Information : The first step of the process is to collect all the details of your employees. Right from their joining date and bank account information all the way to their designation and feedback from reporting managers, a lot of information needs to be scrupulously collected. Diligently collecting this information right at the beginning of the payroll process will not only help you accurately calculate the compensation of each employee but also help you efficiently maintain your records.
- Calculating the Pay Structure :Once you have collected all your employee information, the next step of the payroll process is for you to define the payment structure. Here it is important for you to recognize the difference between the terms CTC (cost to company) and the actual pay your employee receives. The CTC essentially captures the various expenses your organization bornes for retaining the employee, and it can range from canteen and logistic expenses all the way to discounts and leave expenses. By understanding each of these components in detail, you can effectively deduct these amounts from your CTC and arrive at the gross pay of your employees. Once you have successfully calculated the gross pay of your employees, you will need to deduct the various taxes and contributions that apply. Right from TDS (Tax Deductible at Source) to professional tax and employee contributions to social security schemes, each of these needs to first be clubbed together and then subtracted from your gross pay to arrive at the net pay of your employees. The net pay of your employees, in simple terms, is the actual salary they will receive every month, post their deductions and contributions.
- Disbursing the Payroll :Lastly, once you arrive at the net pay of your employees, you need to establish a system such that the accurate amount gets disbursed to your employee’s bank accounts at regular intervals. Irrespective of the payment frequency you follow that is quarterly or monthly, you need to have a system in place such that no discrepancies occur whatsoever.
Post Payroll Operations
Once your employees successfully receive their compensation, the post payroll process starts. This stage essentially includes all the tasks you and your team needs to complete in order to stay compliant with all the rules and regulations of the land.
Right from depositing the taxes and deductions, you calculated in the last stage with the appropriate government agencies to depositing both the employee’s as well as your (employer’s) contributions on to the correct social security schemes is important in ensuring your compliance.
This is a time-consuming process, to say the least, however by earmarking the assistance of a cloud based payroll management system, you can complete all these tasks efficiently.
Running a successful startup arrives with a host of unique challenges; however, with modern advances like cloud based payroll management systems, you can efficiently manage your entire payroll operations. And it goes without saying that understanding the importance of payroll operations to your business heavily impacts the success of your operations, and in this series, we will continue to focus on the same.