You can afford the new hire. But should you make it?
There’s money in the bank. Revenue is looking good. Everyone is busy.
Time to hire?
Maybe.
One of the mistakes we see business owners make is treating hiring as a question of whether there’s enough cash to cover another salary. That matters, of course, but it’s only one part of the decision.
When we’re looking at whether a business is financially ready to hire, we want to understand what that hire does to the business after they join.
Start with the real cost
A $70,000 employee doesn’t cost the business $70,000.
There are employer payroll taxes, benefits, insurance, software, equipment, recruiting and onboarding costs, and potentially other expenses associated with the role.
That doesn’t mean you need to calculate every dollar perfectly before making a decision. It does mean the number you put into your forecast should reflect the realistic cost of adding that person, not just their salary.
Example calculation:
Salary - $70,000
Payroll Taxes - $5,355
Health Insurance - $5,400
Retirement - $2,100
Software - $1,788
Annual Cost: $84,643
It may start at $70,000 but the cost to your business is almost an additional $15,000.
This doesn’t mean you need to offer everything included above. Payroll taxes will be part of the cost, while benefits and other expenses should be based on what makes sense for the role and what the business can comfortably afford long term.
Then assume revenue doesn’t grow
This is where the question gets more interesting.
It’s easy to justify a hire using the revenue you expect the business to generate. We also want to see what happens if that revenue takes longer to arrive.
What does your cash position look like three or six months after making the hire if revenue stays flat?
What happens to your margins?
Can the business comfortably carry the additional expense without relying on everything going according to plan?
A forecast is particularly useful here because you can see the impact of the decision before committing to it.
Know what the hire needs to accomplish
Not every employee needs to directly generate revenue. But every hire should have a reason for being there.
Maybe they create capacity that allows someone else to generate more revenue. Maybe they replace work currently being outsourced at a higher cost. Maybe they free the owner from administrative work so they can focus on sales or client delivery.
Whatever the reason, we want to understand what changes financially once that person joins the business.
If you can’t identify that, it may be worth questioning whether another employee is actually the solution.
Make sure you’re solving the right problem
“We’re too busy” sounds like a hiring problem.
Sometimes it is.
But a business can also feel too busy because it’s taking on work that isn’t profitable, its processes are inefficient, its pricing doesn’t support the level of service being provided, or people are spending their time in the wrong places.
Hiring another person into that environment can certainly create more capacity. It can also make an expensive problem bigger.
Before adding headcount, we’d want to understand what’s creating the need for it.
So, should you make the hire?
There isn’t one revenue number, cash balance, or percentage that automatically tells us a business is ready to hire.
We’d want to know the true cost of the role, what happens to cash and profitability after adding it, how much room the business has if revenue doesn’t grow as expected, and what problem the hire is intended to solve.
Sometimes the numbers tell us the business has plenty of room to make the hire.
Sometimes they tell us to wait.
And sometimes they tell us we’ve been asking the wrong question entirely.
That’s our two cents.
Thinking about your next hire? TFA helps you understand the numbers behind decisions like this, from managing your day to day accounting to forecasting what comes next. SEE HOW WE CAN HELP →
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