Can You Afford to Hire an Employee?
When business is booming, you might wonder whether it’s time to hire a new employee. Growing your team can be exciting, but it can also be very costly. Unless you know what to expect and how you’ll budget for the increased expense, hiring can strain your business financially.
Fortunately, there’s a simple way to figure out whether you can afford to hire.
The real cost of hiring an employee
When you bring in a new employee, not only do you need to take a new salary into account, but you also have to budget for other expenses. This can include recruiting, pre-employment screenings, payroll taxes, benefits, workers compensation insurance, payroll processing fees, office furniture and equipment, and more.
Your actual costs will vary depending on whom you hire and where you’re located, but the U.S. Small Business Administration (SBA) says a good rule of thumb is that hiring usually costs 1.25 to 1.4 times the employee’s salary. So, if you pay someone a salary of $50,000, your actual costs will likely range from $62,500 to $70,000.
Calculating your break-even point
Ideally, hiring a new employee should either increase your revenues or decrease your expenses. Before you take on the added cost of expanding your team, you need to know where your break-even point is.
The break-even point is the point at which revenues and expenses are equal. In other words, the business “broke even” because there were no net profits or net losses.
Companies use a break-even analysis to determine whether their business model will be profitable, how many products they need to sell to cover fixed costs, and whether to invest in new equipment. You can also use it to decide whether you can afford to hire an employee.
To illustrate, let’s say you own a professional organizing business, and you’re so busy that you’ve had to turn down jobs. You want to hire an assistant to help with shopping for supplies, scheduling appointments, and handling your social media. You plan to pay the employee $30,000 per year.
| Annual salary: | $30,000 |
| Other costs of recruiting/hiring/benefits (x .25): | $7,500 |
| Actual cost of hiring: | $37,500 |
Now, let’s say your average $1,500 per professional organizing job. How many additional jobs would you have to take on to break even?
37,500 / 1,500 = 25
To break even on the cost of hiring, you would have to book an additional 25 organizing jobs per year — roughly two extra jobs per month. Any additional jobs over 25 would be pure profit.
If you’re currently turning down several jobs per month because you’re spending a lot of time on the tasks your new employee would handle, that might sound perfectly doable. Otherwise, you may decide you can’t afford to hire a full-time assistant. You may decide to hire an independent contractor or a part-time employee instead.
Of course, the break-even calculation above assumes that your new employee will be 100% productive from day one, which is rarely the case. In reality, that payoff may take a little longer. According to the Harvard Business Review, it usually takes employees 6.2 months to reach full efficiency.
For that reason, it’s beneficial to invest time and money into finding the right employee who can get up to speed quickly and stay with you for the long term. An employee who leaves your business before you reach the break-even point will be a financial loss for your business.
When you start thinking of hiring with an investment mindset, you can make hiring decisions with confidence because you’ll know whether bringing on a new employee will really help your business. If you need help deciding whether you can afford to hire, schedule a call with me! I can help you run the numbers and make better decisions about when and how to grow your team.
