Payroll processing is the payment of wages made to an employee by an employer. It is an important business function hence businesses need to ensure all payroll processes are carried out efficiently. Manual payroll vs. automated payroll are the two types of systems discussed in the blog below. It is important to understand the advantages, disadvantages, and differences between both systems to make effective decisions.
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For most organizations, payroll is its biggest expense. It is, therefore, the most important human resource management function.
What Is Payroll Processing?
The payroll process broadly involves two steps. The first step is the preparation of payroll inputs. The second step is generating payroll reports based on those inputs. These reports are finally used to make salary payments. Processing payroll is a complex activity and involves many factors. In most organizations, these factors are usually documented as a checklist. The checklist serves as a guideline for processing payroll.
A typical payroll checklist would include the following,
- The employee register must be current and up-to-date.
- All new hire documentation must be completed ahead of processing payroll.
- Impending employee exits must be tracked.
- Vacation time and sick leave must be accounted for.
- Salary changes and other payroll adjustments must be noted.
- Attendance and overtime data must be collected and approved by the business heads.
All this information is then consolidated and used to determine the payroll inputs.
Salary adjustments, employee additions, and deletions are made based on the payroll inputs. Government taxes and other statutory deductions are applied. The final amount payable to each employee is determined. Full and Final Settlement Statements are generated. These payroll reports are then verified and approved. Salary payments are then made as per the reports. Payroll may be processed using a manual or an automated process.
What Is A Manual Payroll Process?
A manual payroll process requires one to manage the entire payroll process without using any systems. It depends entirely on human effort. It involves managing the entire process by hand. This would even include monitoring attendance data and calculating statutory deductions.
You must find the most suitable and experienced executive to conduct the payroll process accurately. Otherwise, it will lead an organization to face legal issues, hefty fines, and penalties. This method is most suitable for organizations that have less number of employees.
Let’s look at some advantages and limitations of the manual payroll process.
Advantages and Limitations of the Manual Payroll System
- Cost-Effective
- Customization
- Favorable to small organizations
- Highly time-consuming
- Increased errors
- Requires intensive training
What Is An Automated Payroll Process?
The automated payroll process, on the other hand, uses specialized payroll software. This software can automate almost all the payroll process steps and requires minimal human intervention. Attendance management systems can be used to track attendance and overtime. They can be linked with the payroll software, which tracks leave requests. At the most, one might need to enter new hire information and employee exit dates into the system. Automated payroll systems can typically take over the rest. This could include calculating tax and statutory deductions based on the applicable region.
The advantages and limitations of both processes are explained in detail further below in the blog. First, let’s have a look at the difference between a manual payroll vs automated payroll system.
Advantages and Limitations of the Automated Payroll Process
- Time-saving
- Effective professional assistance
- Tax compliant
- Document Management
- Reporting
- High Investment
- Data loss instances
- All the data needs to be backed up.
Difference Between a Manual And Computerized Payroll System
P.O.D | MANUAL PAYROLL SYSTEMS | AUTOMATED PAYROLL SYSTEMS |
|---|---|---|
| Effort | Individuals manage the entire payroll process. This is achieved entirely by hand without any systems. | The entire payroll process can be managed using a computerized system. It requires little human effort. |
| Automation | This is a lengthy process as all the steps in the payroll processes have to be managed manually. As a result, there is little scope for automation. | With automated payroll systems, the processes get more streamlined. Almost all the steps in the payroll process have scope for automation. |
| Bottlenecks | This system is more prone to bottlenecks. It involves a lot of coordination, deadlines, verification, and approvals. | These systems are centralized and collect information on a real-time basis. The layers of coordination, verification, and approvals are fewer. |
| Consistency | This system is more prone to inconsistencies. It is heavily dependent on the dynamic nature of the human activity. | An automated system does not leave much room for inconsistencies, as almost all the processes are automated. |
| Accuracy | The scope of possible human error is large. So achieving a software level accuracy is not feasible in manual processes. | This system eliminates human error by minimizing human intervention. The scope of errors is marginal. |
| Payroll Security | This is a less secure method as it involves a lot of paperwork and does not have much scope for encryption. Those looking to misuse the data do not need to be skilled at compromising data security. | Automated payroll systems are more secure as data is encrypted and password protected. So to penetrate through the framework of these software is next to impossible. |
| Reporting and Analytics | Data may not be up-to-date or available in real-time. This is because it involves more data entry work and manual effort. Reports may not be available immediately. Any analysis of the reports will need concentrated effort and time. | Data is available in real-time. Reports can be generated within minutes from the system by those with access to it. The level of data-entry work involved is minimal. Most Payroll systems also have built-in analytic capabilities. |
| Cost | The start-up cost of a manual payroll process is much less than an automated one. It may seem like a cheaper option. However, this process may eventually catch up with the cost of the automated system. It may even be costlier. This is due to the cost of the additional resources used, the long hours spent processing payroll, and other overheads such as internet connectivity, papers, calculators, etc. | The start-up cost is considerably higher in this case. Automated systems do not require a lot of time, resources, and overheads on a regular basis. They may eventually be a cheaper option in the long run. |
| Business Continuity | Maintaining business continuity is a major issue as this system relies heavily on individuals. It also involves a lot of paper trails. Backing up information is not easy in this case. Paper records could get destroyed or misplaced. | Information is stored electronically. It can be accessed by authorized individuals. It may be easier to continue business as usual. |
| Scale | Scaling processes via a manual payroll system is tough as It would require hiring and training individuals. This could be a time-consuming activity. | These systems are built to serve a large number of customers and stakeholders. They are much easier to scale as per the requirements. |
| Suitability | This method can be counter-productive in the long run. Individuals may end up wasting too much time on low-value or unimportant activities. This system requires too much time and effort. Also, it is much more prone to errors. | In the long run, this method saves time, effort, and resources and is more reliable. Individuals in the organization are free to focus on high-value activities as repetitive tasks are automated. This method is highly assistive in increasing productivity. |
| Nature | The manual method is more reactive in nature. It responds to the requirement of the business and the customers. It functions based on that. It takes a much longer time and a lot more resources to build a manual system that is quick, efficient, and accurate. | The automated method is more proactive. It has built-in capabilities that are already designed to save time and effort. They are made to be more reliable and accurate, with little effort. |
| Environment-friendly | This method involves a lot of paper trail. Therefore, it is a less eco-friendly option than an automated payroll system. | This method is quicker and does not involve much paper usage. Therefore, it is better for the environment. |
| Customization | The scope of customization is ample. The manual process can be tailored and personalized based on the needs of the employees and the organization. | Payroll software can have scope for customization but only to an extent. They are designed to serve a variety of clients across various industries. They cannot be completely tailored to a particular organization’s requirements. |
| Skill | The individuals hired would need prior training and experience in payroll management. They would also need to be knowledgeable about statutory laws and compliance-related matters. | Almost all the steps in the payroll process are automatic. This would include statutory reporting, tax deductions, etc. Automated systems are easy to use and require minimal data entry. They do not need highly skilled individuals to operate it. |
| Replacement | Individuals, processes, and equipment used in this method can be replaced at any point. | Automated systems need a huge initial investment. Payroll software requires a long-term commitment and is not easy to replace. |
| Customer Satisfaction | This method is more time-consuming. It is prone to errors which may cause dissatisfaction among the organization and employees. | Automated systems are more reliable, quick, and accurate. They ensure timely and correct salary payments. This would lead to higher satisfaction. |
Hence, this was the difference between manual payroll vs. automated payroll. Now let’s quickly overview the advantages and disadvantages of payroll manual and computerised payroll systems.
Benefits of Manual And Automated Payroll Processing
Let’s look at the benefits of manual and automated payroll systems individually.
Manual Payroll System
The benefits of manual payroll systems are as follows:
- A manual payroll process can be ideal in a small organization with a limited workforce.
- It can be personalized and tailored to fit the requirements of an organization.
- It could be more flexible, unlike a rigid automated system.
- It is easier to adopt as it requires a much lesser investment.
Automated Payroll System
Benefits of automated payroll systems are as follows:
- For accounting and payroll task of large enterprises, an automated payroll system is the most viable option.
- It ensures efficiency and eliminates much of the effort. It requires much less time and resources.
- It may be a considerable investment, but one can gain much from it in the long run.
Disadvantages of Manual And Automated Payroll Systems
Let’s look at the issues encountered in manual and automated payroll systems one by one.
Manual Payroll System
- Manual payroll processing requires much human effort.
- There is increased scope for errors, and it is a far more time-consuming activity.
- Recruiting, training, and managing a team of skilled individuals is also a considerable expenditure.
- It is not practically feasible for organizations with large employee sizes to follow this system.
Automated Payroll System
An automated payroll management system also bares its challenges. They are as follows:
- It typically involves a huge initial investment and a long-term commitment.
- Individuals in the organization should be willing to step out of their comfort zone. They should be ready to commit to a new system.
- Often, new systems are perceived to be complicated and are met with resistance.
- Automated systems are standard and impersonal, which may sometimes be problematic.
How Can A Payroll Software Help With Payroll Processing?
The success of any business process lies in its efficiency. Automated systems ensure timely delivery, accuracy, and reliability. They eliminate much human intervention and provide consistent and reliable results. They can be an excellent cost-saving proposition in the long run. As per the statistic, approximately 62% of organizations used cloud-based payroll systems in 2023, a 34% increase from the usage in 2019.
One must take care, however, in selecting an automated solution. One must find the best fit for the organization. Plans for the near and distant future must be considered. Automated payroll systems require a heavy initial investment and a long-term commitment. A solution must be chosen with care after evaluating multiple options. Close attention must be paid to its implementation. These factors are important to make it an effective proposition.
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"Based on the employee size and budget, an organization needs to determine which payroll system will be feasible. If a manual payroll system is preferred, then experienced and skilled executives well-versed in statutory compliance laws must be hired. If the organization is large and the automated payroll system is to be chosen, then effective analysis between different software available must be done that meets the organization's requirements"
Wrapping Up
Employees expect to be paid in a timely, accurate, and consistent manner. Seamless payroll management is important for the morale of an employee. It also impacts the reputation of an organization. It affects the perception of its financial stability. An automated payroll process is a way to go and automate tedious processes to drive efficiency. So from this article, companies can effectively choose between manual payroll vs. automated payroll systems.
In consonance with payroll software, an organization might also require accounting software to automate and streamline processes and to overcome the errors caused during manual accounting. So go ahead and choose the best payroll software for your organization to gain an instant competitive advantage.
Frequently Asked Questions
The risks associated with manual payroll systems are as follows:
- The major risk is the frequent causing of errors as the processes are manually handled.
- Keeping track of the payroll data, like time and attendance of the employees, to process the payroll is a tedious task, and a huge risk of inaccurate calculations is associated.
- Consider your budget
- As the payroll tasks get repetitive, employees' productivity level gets hampered, and this leads to causing errors.
Amaey Anand is a certified accountant with over 10 years of experience in the finance industry. He has worked with various organizations to streamline their petty cash management processes and reduce inefficiencies. He has also written several articles on financial management for leading publications such as Zensuggest and The Wall Street Journal.
