Booming business leads to growth in your company’s financial situation, and it often means a growth in the workforce, as well. When your clients reach the point of hiring employees, they also face additional considerations, such as how to budget for extra salaries. As you help your clients with annual budget planning, consider the impact of more employees to help your clients strategically integrate the new member of their team while keeping their finances under control.
Cost of a New Employee
To incorporate a new employee into your client’s annual budget, you need to know the total cost of each new employee, including compensation and benefits. The value or revenue the employee brings to your client’s company isn’t a concern at this point. Only focus on the company’s expenses for hiring new employees. This may include salary, health insurance, dental insurance, life insurance, disability insurance, matching retirement contributions, vacation, severance pay, and other fringe benefits.
Second, consider the incidental costs related to the employee’s role. If your client adds a salesperson, the company may spend more on reimbursing meals and travel when the new employee goes on sales calls. If your client adds a licensed professional, consider the impact of training and conferences required to maintain the licence. These costs have a systematic impact across the business. By increasing staff size, other expenses in addition to compensation may increase.
Traditional vs. Zero-Based Budgeting
Once you and your client have the cost of the new employee determined, you can factor the expenses into the annual budget. You have the option to use either the traditional budgeting method or the zero-based budgeting method to create the budget. If your client doesn’t expect many changes next year, it’s easier to use a traditional budget that rolls over the figures from last year. You can easily incorporate the minimal changes expected.
Zero-based budgeting may be a good alternative when a client plans to add team members. Because adding to the employee headcount signals significant changes in company strategy, you may need to plan to change other areas of the yearly budget. Start with every general ledger account being budgeted at $0, and only add budgeted amounts supported by an actionable plan for next year. Understand that many of the items budgeted have to be estimated, especially because of the changes.
Ways to Cover New Employee Costs
Businesses typically manipulate the budget to make room for additional expenses by increasing revenue or decreasing other expenses. Regarding revenue, be honest about the new employee’s value to the company and their ability to generate sales. If the new employee interacts with customers or helps with a manufacturing shortage of inventory, it’s fair to expect an increase in sales. In these situations, you can budget for higher revenue next year than this year.
Looking at the shift in operation efficiency can help manipulate the expenses in the budget. A salesperson may incur additional expenses, but the additional sales efforts should bring in more customers. A new employee assisting with manufacturing can improve operations and reduce processing hours, cut waste, and reduce the need for storage costs. Looking at both the cost of an employee and the potential savings associated with the hire can help you accurately plan the budget.
Honesty from your client regarding their upcoming plans is an important part of developing an accurate yearly budget. Using accurate underlying assumptions helps strengthen the budget’s accuracy. Your clients should understand that adding to the headcount is a massive addition to the budget. Help your clients realize that adding a staff member doesn’t guarantee additional revenue or cost savings can cover the new costs. Your client’s budget is only as strong as their long-term strategic planning, so ensure your client has an actionable plan that’s fairly represented in their budget.
Adding new employees comes with risks, but you can help your clients prepare for the financial changes by incorporating their impact into the annual budget. Honesty about the effect of adding to the team helps your clients make the best decisions for their financial future. QuickBooks Online Accountant helps you manage projects, tasks, and clients together. Sign up for free.