There’s a lot that goes into deciding whether or not you can afford to hire a new employee. You have to consider the cost of their salary, benefits, and training, as well as the impact they’ll have on your existing team dynamic.
If you’re thinking about hiring a new employee, here are a few things to keep in mind when you’re deciding whether or not you can afford it:
Defining the type of employee when you hire
Whether part-time, full-time or contractor, you have to start by defining the role and expectations for this new hire. Get clear on why this role is needed in the company. Ask yourself, how critical is it to hire for this role right now?
Take into consideration the cost difference (which we will cover in-depth), timing of when to hire, understanding current burn rate, what is the benefit/ROI of this new hire, and ultimately how to best prepare from a cash flow perspective to afford this new team member.
If you’re worried about affording a new employee, consider total compensation.
Make sure to factor total compensation cost including hourly or salary pay, benefits, time off, home office allowances (monitor and laptop if applicable), payroll taxes as well as any additional payroll costs for adding another employee. Don’t forget about those software subscriptions for any of the technology this employee will need to utilize in their role. You can also work with a payroll provider who is familiar with state employment laws and state required benefits.
If you are hiring a contractor, the cost is simple since you have either an hourly rate (which may vary with the amount of hours) or monthly retainer amount. Make sure to have them complete a W9 before you start paying them.
Researching the market rate to help you decide if you you afford your new hire’s compensation
When it comes to compensation, it is more an art than an exact science. Doing research to understand what employees or contractors expect is important. You want to be competitive in the market and research will help you determine what are the pay ranges for the roles and responsibility. You can always expect a negotiation, so if you have a target in mind, make sure to add a 10-15% buffer.
Affording a contractor
In the case of a contractor, I always recommend you get 3 comparable quotes before making a decision. A more experienced employee or contractor will cost more, but they might save you time. Experiences means they will train faster and deliver higher quality of work with less supervision. Cheaper is not always better!
If you can’t afford what you need yet…
You can always grow the employee based on their skill sets. Be realistic with your budget and what you can get for it. That could be mean compromising initial expertise and investing in training.
I see many business owners overspending beyond what their business can really sustain, which directly impacts and threatens the company’s profitability. If you need help creating a budget for your business before you hire, feel free to reach out to a CFO. They can help you forecast and plan out your upcoming hiring strategy.
Timing the hiring of a new employee
When deciding when to hire an employee, you need to take into account the amount of time it takes to find someone qualified, interview and decision timeline. Additionally, you need to account for onboarding and training that could cost you between 60-90days before the employee starts producing outcomes.
In the case of a contractor, this timeline would be between 30 days or less if you are hiring someone experienced and who can self-manage. Remember you need to have training materials and someone needs to be in charge of setting your new hire up for success in their first 90 days.
Benefit (ROI) and Monthly Burn Rate
In order to measure the benefit or return on investment (ROI), take into consideration if the role is “billable” or “revenue generating.” Afterall, admin and general support roles may not generate revenue. If you are hiring a salesperson, you should have a sales target they need to achieve to make sure the benefit is clear.
For an admin/general role like a virtual assistant or operations manager, the “benefit” will be measured around the time they are saving you. If they free up your time, you can delegate more or do the client facing work for you. That is valuable! Ideally, you are repurposing that time to do more business development or sales that directly impacts revenue growth. After all, time is money!
Next, look at your current rate of monthly expenses and your business debts. How much does it cost you to run your business in a given month? You can average the last few months to get a good idea. Compare that to your revenue as a percentage.
Depending on how long you have been in business, you might be between 40-50% expense to revenue ratio but can be as high as 70-80% depending on the industry and type of business. As your company grows, you can choose to hire more employees or contractors which will increase both revenue and expense. When you keep your cost fixed while revenue grows, that is when your profit will increase.
Just remember, scaling is hard. Timing these decisions will be key in managing cash flow and profitability.
Affording a new hire with a cash Flow Runway
Before you make any hiring decision, make sure you have the cash runway to give you between 30-90days to allow for that new hire to start producing results. Depending on how well you onboard your new hire, the faster they will be able to produce a positive impact.
Regardless, you still have to be prepared to pay for them while they are training and getting comfortable with their role. This cash cushion will give you peace of mind and help you feel confident to afford a higher payroll cost. Things might look worse at first, but trust that if you made the right hire, this will pay off or if it is not a good fit, fire fast.
Summary: What to consider when deciding whether or not you can afford to hire a new employee
Types of hires – employees vs contractors
Compensation – competitive salary information, consider your budget and level of experience
Timing – it takes time and don’t forget to account for onboarding and training time for your new hire
Benefit (ROI) and Monthly Burn Rate – type of role either revenue generating or time savings and measure monthly cost as a percentage of revenue
Cash Flow Runway – have a cushion and be prepare before making a hiring decision
If you are ready to expand your team, but don’t know how to create a plan to be able to afford it, feel free to reach out to book a call with a CFO to review your company’s financial situation. We will help you craft a plan that makes you feel confident in your decision to hire another team member.
About the contributor – Carla Titus– Founder/CEO of Wealth & Worth Within
Finance expert with over 15 years of combined corporate financial planning, analysis, strategy, and established online businesses fractional CFO consulting experience. Our company provides a vast array of on-demand CFO services that leverage our industry expertise. A well-rounded CFO team with Finance, Sales & Marketing, HR, Supply Chain, Online Business, Operations, Execution, Planning, and Tech background.
She provides fractional CFO services and financial consulting to business owners. Wealth & Worth Within’s mission is to empower business owners to achieve financial clarity and peace of mind so that they can get back to what they enjoy.
She is dedicated to imparting financial knowledge in order to properly manage finances and achieve profitable results. She has applied that expertise to businesses, helping them grow by creating simple yet effective systems to improve cash flow management and bottom-line results.