Demystifying the Payroll Cycle and Its Types: Essential Insights for Business Owners and HR Professionals

Demystifying the Payroll Cycle and Its Types- Essential Insights for Business Owners and HR Professionals

We all know that any business’s proper functioning requires proper coordination between various departments and activities. Keeping proper track of the structure of remuneration provided to the employees is of utmost importance when any firm is considered since it helps us to keep an account of cash inflow and outflow. This is why keeping an updated payroll structure is paramount for every organization.


When it comes to the case of payroll, the organization’s Human Resources department must keep an account of the same. Thus, every organization must include experts well-versed in payroll preparation in their Human Resources department to develop a specialized payroll structure. This article will shine a light on the concept of payroll and payroll cycle and its importance in an organization. Thus, every business owner and HR manager should go through the article if you wish to understand the same better.


What is payroll, and why is it essential to maintain payroll in a business organization?


It is a fundamental principle that employees are the backbone of every organization. The overall productivity and, thereby, profit of every organization is primarily dependent on how employees work. The mentality of employees towards work also has a significant role in determining their productivity. Adopting a proper remuneration scheme is always necessary to uphold and enhance employees’ morale. At the same time, it is essential from the part of the organization to keep track of these transactions that are provided as remuneration. It will help the organization with cost-benefit analysis and meeting other requirements related to account keeping.

A company’s payroll refers to all the activities associated with payment to employees, such as remuneration provided for their work, hours they have worked for the organization, and various payments such as overtime pay, bonuses, etc. It also considers various taxes and other funds, such as those for Social Security and Medicare. Thus, payroll preparation is an activity where all the factors mentioned above are considered and require the utmost expertise. The human resource department of an organization is generally the one who is responsible for the preparation and maintenance of payroll records in an organization.

Payroll management plays a vital role in the functioning of any organization. The importance that payroll management has in any organization can be summarized as below:



Accuracy in payment to employees


Payroll preparation provides the organization with accurate data related to remuneration so that accuracy can be brought in making the payment to employees. Payroll management thus allows the organization to accurately track various data relating to employee remuneration and other aspects.


Enhances morale and thereby increases the loyalty of employees towards the organization


The positive feeling that can be created in employees’ minds once they are treated well within the organization is immense. Getting desired payment according to the work provided to the organization can improve the morale of the employees, especially the hard-working ones, to a great extent. Management of proper payroll records helps the organization frame remuneration and salary structures that can identify the effort employees put into their work. Getting proper remuneration also helps to enrich employee loyalty. This also saves a considerable amount that has to be spent continuously on training programs that could be required in case of a high employee turnover rate. This, in turn, also saves a considerable amount that has to be spent on recruitment programs. It also ensures that the best-performing employees of the organization do not leave it.


Eases legal procedures of the company


As we all know, all the companies within our country have to function by abiding by the rules and regulations in our country. Moreover, specific specialized laws in the country are meant exclusively for companies within the country. Following all such rules and regulations demands proper record-keeping of various financial transactions within the country. Payroll management facilitates all these processes since proper data datakeeping is crucial in payroll preparation.


Improves financial stability of the organization


Financial stability is always one of the most attributed qualities of every organization. Investors tend to invest more in more financially stable companies since they are considered much more reliable than those facing financial instability. Payroll management, by keeping track of financial transactions and facilitating financial planning, always promotes the firm’s financial stability.


Easy and efficient streamlining of various business processes


Today, with the growth of technology worldwide, payroll processing has become much more efficient with the help of several technological tools. This results in efficient payroll data management by providing accurate information and reducing the enormous amount of time that must be spent on it if done manually. Thus, the saved effort and time can be effectively used for any other productive business activity.



What is meant by the payroll cycle?


Generally, the business activities recorded during payroll preparation, also known as payroll activities, tend to have a uniform structure or general form. These payroll activities are generally recurring in nature. It is common knowledge that compensation to employees is to be rendered regularly. There lies a complicated administrative process behind the payment of recurring compensation, generally called the payroll cycle. Moreover, the cycle or gap between those recurring compensation payments must not be the same. Payroll cycle is the term that also denotes the time gap or period with which two consequent payments take place.


How are payroll cycles classified?


Payroll cycles are generally of many types. The classification of payroll cycles into different types is done mainly based on the period gap between two recurring compensations. It is a well-known common fact that the compensation pattern and period with which it takes place dramatically varies from one type of industry to the other. There might also be specific compensation schemes to be awarded to the employees only at specific instances or under certain exceptional circumstances. All these factors are considered while classifying the payroll cycle into various types or categories.


Different types of payroll cycles


As we have already mentioned above in the paragraph, payroll cycles are classified into various types based on periods or time gaps between two consecutive payment sessions. Some of the most common types of payroll cycles are the following:

  • Weekly – In which payments are provided once a week.
  • Bi-weekly payroll cycle – Payments are rendered once every two weeks.
  • Semi-monthly payroll – Here, payments are provided two times a month.
  • Monthly – One of the most common payroll types in which payments are provided once a month.

Apart from the classification mentioned above, there exists another mode of classification of payroll cycle into various types such as regular, off-cycle, retroactive, and final payroll.

Normal payroll cycle: Normal payroll cycle refers to the type of payroll in which all kinds of regular wages or salaries are considered. A normal payroll cycle is generally applicable in the case of compensation procedures in which payment is made on a specific day after a regular interval of time. Taxes are also taken into consideration while calculating the average payroll scale.


Off-cycle payroll – Several additional payments exist to the employees apart from the regular wages or salaries. These are in the form of incentives or bonuses, mainly intended to boost employee morale. Such additional payments provided to employees exempted from the regular pay are known as off-cycle payroll.


Retroactive payroll – There may be situations where a shortfall in compensation can occur during the previous pay period. Such a shortfall must be corrected in the next payment to compensate for the same. Retroactive pay aims to correct such shortfall by adding the compensation amount to the next payment.

Final payroll – The payroll that takes place during the final period of the employee in that particular organization, which means during the resignation, is known as the final payroll. All kinds of financial settlements are included in the final payroll.


Steps of a payroll cycle


Since a payroll cycle is a set of tasks during a given payment period, it is normal that a payroll cycle is not confined to a single-step procedure; instead, it involves a series of steps. Some of the essential steps of a typical payroll cycle are s described below:


1. Information updation

The entire system of payroll cycle, as well as payroll processing, is mainly dependent on information regarding firm employees. Since the main motive of payroll is to keep track of various compensations provided to the employees, it is of utmost necessity to have well-updated data regarding the employees. The data must contain all the updated information regarding the employees, such as the number and other details of newly hired employees, pay rates and any increase in them, salary provided to each employee, working hours, etc. Apart from the employee details, other data associated with the firm, such as tax-related information, funds for social security, insurance premiums, etc, should also be included while updating the information.


2. Work time calculation

The second, as well as one of the most essential steps in the payroll cycle, is none other than work time calculation. Identifying the quality of work provided by employees and providing them with suitable compensation is considered one of the primary purposes of payroll. To ensure this, it is essential to record employees’ work time through manual or automated systems so that at least the quantity of time employees spend on their work can be identified and can be provided with suitable compensation.


3. Calculation of deduction

The payroll and payroll cycle is not only about paying salaries and bonuses. It also has to deal with various taxes and other deductions. So, to calculate the net payment of employees, various adjustments relating to tax payments have to take place. This is undertaken during the process of calculation of deduction.


4. Confirmation of payroll processing

Once all kinds of calculations are undertaken related to compensation and taxes, the next step is to confirm the payment processing by the company’s administrator. All kinds of calculations, whether automated or manual, must be verified and confirmed by the authority before transferring the salary to the employee’s account.


5. Accounting

Recording all the financial transactions, also known as accounting, is the final step when the payroll cycle is considered. All the transactions made for the compensation payment are entered into the books of accounts as journal entries. These will be used in the future for various decision-making activities, too.


Payroll process in HR


Since the Human Resources department of a business organization must ensure that the employees receive the required compensation, payroll processing is of utmost importance to the HR department. Any mistake incurred during the payment of wages or salaries can even affect the reputation as well as the reliability of the organization. Adopting proper measures for payroll processing is one of the best methods by which companies can ensure that their employees are rewarded regularly. Payroll processing refers to all the administrative measures to provide proper pay based on factors such as employee type, salary provided, deductions such as tax, pay rate, etc. Payroll processing is a very complex activity since many variable factors are involved in it. The HR department must keep several key concepts in mind to ensure accuracy in payroll processing. These are as mentioned below:



Ensure that you begin with clean data – Mistakes that may creep into the data on which payroll processing is done can affect the reliability of the entire process. Thus, ensure that you begin with data that is devoid of mistakes. Several checkpoints can be added to ensure this.


Check for inconsistencies in information based on timesheets – Always employ a system to check whether there are any inconsistencies in the type of employees or hours worked along with the pay scale. Such a system ensures that no amount is overspent on payroll due to mistakes or inconsistent work hours.


Develop an idea about the total payroll costs – An employee has to be rewarded, not merely with salary alone, but also with certain other benefits such as bonuses, incentives, etc. The HR manager should have a well-developed idea regarding the cost incurred by the employee to the company by adding up all such expenses. This will provide an idea regarding the cost-benefit analysis and determine the employee’s worthiness within the organization.


Production and distribution of payslips should always be a primary concern – We all are aware of the fact that the satisfaction of employees plays a leading role in determining their productivity. Thus, the HR department should be dedicated to producing and distributing employee payslips. This payslip should contain information regarding the gross pay, net pay, and other deductions. Apart from ensuring employee satisfaction, they can also develop an idea regarding the areas that provide scope for growth and improvement.


Ensure that all employees receive minimum wages – We are living in a country where the law guarantees a minimum wage to different types of employees. During payroll processing, ensure that the compensation structure is designed at least in line with the minimum wages as decided by law. Otherwise, it may lead to severe complications, such as punishments and penalties for the company. Moreover, providing the employees with a minimum wage also improves the company’s reputation in public.


Adopt various technological tools to simplify the process- Today, a considerable number of options are available in terms of technology that can cater to the needs of payroll processing. Several software that can automate the process are known to be highly useful these days. The HR department can incorporate such technical tools into payroll processing to improve the speed and accuracy of the process.


How do you choose the best payroll cycle for your organization?


As we have already mentioned above in the article, various types of organizations adopt various payroll cycles depending on various factors. Although this is the case, there are certain important factors that must be necessarily taken into consideration. The most important of all are the statutory regulations that exist in the area of their operation. The company has to ensure that the payroll cycle is in accordance with the regulations of the country. The type of employment is also another factor that has to be taken into consideration. Even in a single firm, there may be a requirement for imposing various types of payroll cycles depending on various types of jobs. Generally, it is seen that unskilled employees are rewarded more frequently when compared with skilled workers, who receive their payment mostly on a monthly basis. The type of industry to which your firm belongs also plays a vital role in determining the type of payroll cycle. Generally, there might be a certain type of payroll cycle that the entire industry follows. Companies belonging to the same sector generally follow similar patterns in the payroll cycle.


Finally, the cash flow of the company is also an important factor that determines which type of payroll cycle a company should adopt. The mode of cash inflow may also vary from one company to another. In one type, the inflow may occur on a daily basis, whereas in some others, it may be on a weekly or monthly basis. So, the HR managers have to keep in mind that the payroll cycle you frame for your organization must be in accordance with the pattern of cash flow. Apart from all this, ensuring employee satisfaction is the primary aim of each and every payroll cycle. Thus, the payroll cycle should be designed in such a way that it can cater to the needs of the employees within the limits.



Conclusion


The role played by employees in the successful functioning of any business organization is vital, such that keeping them satisfied and maintaining high morale has become necessary for any business organization. This is why the role of payroll processing, as well as the payroll cycle, has been increasing day by day. Every successful business organization must have learned that keeping proper payroll records can significantly ease the reward or remuneration process. Although payroll preparation may seem tedious, the advantages that would be created once it is done are immense.

In short, payroll management in HR has become an integral part that ensures that employees are appropriately rewarded according to their work. The payroll process is not a single-step procedure; instead, it involves a series of steps or tasks to be completed by the administration to ensure proper remuneration measures. Although the types of payroll cycles in different companies may vary according to their mode of operation, it has become an integral part of every organization that wishes to ensure employee satisfaction.


Frequently Answered Questions (FAQs)


1. What is a payroll cycle, and why is it crucial for businesses?


The payroll cycle can be defined as a cycle of processes within an organization between two consecutive paydays. In other words, the period when salary or wages are distributed to company employees may vary. The payroll cycle is the time gap between two consecutive payment distribution days.

The frequency employees are paid in an organization is crucial in determining their satisfaction. The payroll cycle determines the frequency of payment in an organization. Apart from that, the payroll cycle is not just a time gap; it also considers various activities that happen between two pay distribution days. An organization with a proper payroll cycle ensures employees receive the proper remuneration at the right time. Payroll cycles are an essential tool that brings regularity and stability to any business organization. Apart from all the factors mentioned above, the reputation and reliability that a proper payroll cycle brings to a company are immense.


2. What are the primary phases of the typical payroll cycle?


The basic steps that constitute a typical payroll cycle consist of the processing of pre-payroll, the printing of the payments, the processing of journal entries, the printing of the payroll cycle reports, and processing a final update. During the initial phase, which is the processing of pre-payroll, all the initial data and files are gathered. The remaining procedures on the payroll cycle operate on this data. Once the processing of the pre-payroll is completed, the payments can be printed after reviewing all the information gathered during the previous step.

Once payments are printed, we need to record them as journal entries in the books of accounts. This is considered to be the third phase. The payroll cycle reports generated can also be printed after reviewing the previous step, which is processing the journal entries. The journal entries need to be accurate so that accounting can be done accurately. The final phase is to process the final update. During each step, the HR manager must ensure no inconsistencies or mistakes creep into the data. Any mistake can even affect the reliability of the entire payroll cycle. The initial collection of required data to prepare the payroll cycle is a step that must be done with utmost care and perfection.


3. How do different types of payroll cycles, such as monthly, semi-monthly, bi-weekly, and weekly, work?


The payroll cycle, or the period between two consecutive payment days, varies from one type of organization to another. Thus, payroll cycles are divided into various types, such as monthly, semi-monthly, bi-weekly, and weekly, depending on the time gap.

The monthly payroll cycle refers to the payroll cycle in which payment is provided to the employees once every month. Thus, the time gap between two consecutive payment days is one month when it comes to the case of a monthly payroll cycle. The monthly payroll cycle is considered to be one of the most common payroll cycles among companies all around the world.

Although this is the case, there may be variations depending on work sectors. Semi means half, and semi-monthly, as the name suggests, refers to the payroll cycle in which payment is provided to the employees once every half month. This mode of payroll cycle is more frequent in making payments than the monthly payroll cycle. Bi refers to the number two. A bi-weekly payroll cycle is the payroll cycle in which payment is provided to the employees once every two weeks. On the other hand, the weekly payroll cycle is the payroll cycle in which employees receive their remuneration once every week they work.


4. What are the advantages and disadvantages of each payroll cycle type?


Each payroll cycle type has its advantages and disadvantages. The main advantage of a weekly payroll cycle is that it improves the flow of cash within the firm. On the other hand, since weekly payment is more frequent than other modes, a huge amount of time will be spent on making payments. A bi-weekly payroll cycle ensures the employees have regular, consistent, and predictable pay, but at the same time, reduces administration effort as compared to weekly pay. Lack of flexibility is one of the main disadvantages that arise in the case of a bi-weekly payroll cycle. The advantages and disadvantages of a semi-monthly payroll cycle are similar to that of a bi-weekly payroll cycle. Monthly payroll cycles provide us with a huge number of advantages, such as a reduction in payroll costs, predictability and stability in payment. On the other hand, monthly payroll cycles do have some disadvantages, such as increased financial burden on employees, making the end of the month busy, etc.


5. Are there industry-specific variations in payroll cycles that business owners and HR professionals should be aware of?


Although there are various types of payroll cycles, different companies choose different types of payroll cycles depending on the type of industry they belong to. Generally, it is seen organizations in the primary, as well as secondary sectors adopt payroll cycles that make out the payment frequently. On the other hand, companies functioning in the service industry are known to choose payroll cycles that are less frequent, such as monthly payroll cycles.


6. How can businesses streamline their payroll processing within the chosen payroll cycle for accuracy and efficiency?


Since the functioning of a business requires the proper coordination of various activities associated with it, streamlining various activities is always a necessity. A business chooses its payroll cycle depending on various factors such as the cash flow of the company, statutory regulations that the company has to follow, type of employment followed in the company, etc. Thus, it is necessary to streamline the payroll process with the chosen payroll cycle for greater efficiency as well as accuracy. In order to do so, we have to review the payroll policy and adopt an automated system to ease the procedure. Adopting automated techniques in the payroll cycle can improve efficiency by speeding up the process, that too with great accuracy.


7. What emerging trends and innovations are shaping the future of payroll cycles and payroll processing?


The greatest emerging trend in the field of payroll cycle, as well as payroll processing, is the growth of technology. The rise of technology has facilitated the introduction of various automated tools in the field of payroll processing. The introduction of such tools to payroll processing can ease out the entire procedure. As we know, there are a series of steps involved in payroll processing. If undertaken manually, there are high chances for mistakes to creep in. All such issues can be resolved to a great extent if we depend on automated tools for payroll.