Hiring at the right time is the difference between creating a cash-generating machine and struggling with an unprofitable business. If you are the owner of a service-based company, then you will know all too well the growing pains of business.
Mastering that balance between supply and demand is tricky, but recognising the cues and triggers is a skill that is greatly needed. Ideally you would want to forecast future growth and hire a new employee at a time where they can be trained up and ready for a surge in demand.
In this article, we look at the important area of knowing when you can afford a new employee.
Is there ever a ‘right’ time?
Many business owners just go with their gut feel and decide that it’s time to hire someone new. But this mindset is fraught with emotion and a successful business is always run with the numbers in mind.
When you shift your decision making processes to a more systemic framework, you’re going to make better decisions.
Hiring is a cost
New employees take time to get up to speed. They are a drain on resources and therefore place constraints on your business. Staff needed to support a new employee aren’t adding revenue for a period of time.
So do make sure that you have factored in enough revenue to cover both the direct and indirect expenses of hiring someone new.
The two rules for profitable hiring
It is recommended to use the rule of thumb of having at least 2 times the new employee’s monthly salary as committed revenue and 2 times the new employee’s monthly salary in cash.
This way, you should have the ability to justify the new hire and significantly reduce the risk of eroding your profit.
You do not want to fall into the trap of increasing headcount without increasing your profits. As you expect losses from the unavoidable drain on resources that your new hire creates, you want to have backup revenue and cash to ensure you can maintain a profitable business.
To put it another way, if your new employee expects a salary of $5000 a month, then you will want to ensure you have $10,000 of committed sales and $10,000 in spare cash available.
Using your business’s financials to guide your decision making processes means that emotion and ‘gut feelings’ are left out of the equation or minimised. So next time you’re wondering if you can afford to hire that new employee, go back to the two golden rules of hiring economics. Doing this will ensure you will grow profitably, not grow broke.
If you are interested in discussing this strategy in further detail, contact our team at Glance Consultants.
