An important step for any business is adding employees. As you help your clients build their annual budget that incorporates higher headcount, understand the full impact the new employee will have, and help your clients strategically integrate the new member of their team.
Cost of a New Employee
The first step in incorporating a new employee into your client’s annual budget is determining the total cost of compensation and benefits. Disregard any value or revenue the employee brings to your client’s company. Only focus on what the company has to pay for this new employee. This includes 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, consider the impact on meals and travel. If your client is adding a licenced 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.
Comparing Traditional vs. Zero-Based Budgeting
Once you and your client have the cost of the new employee determined, factor the expenses into the annual budget. 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. Incorporate the minimal changes expected.
Since your client is adding a new employee, consider using zero-based budgeting. Because adding headcount, especially if your client is a small business, signals significant changes in company strategy, plan to change other areas of the annual budget. Start with every general ledger account being budgeted at $0, and only add budgeted amounts that can be supported by an actionable plan for next year. Understand that many of the items budgeted have to be estimated, especially since the company is undergoing changes.
Discovering Ways to Cover New Employee Costs
In general, a budget is manipulated 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 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, budget revenue higher next year than this year.
For expenses, explore any operational efficiencies. A salesperson may incur additional expenses. However, the new employee assisting with manufacturing can improve operations and reduce processing hours. This employee could also reduce waste and the need for storage costs. New employees can reduce consulting, legal, accounting, or other professional fees. Leverage the contacts of the new hire for pricing discounts.
When developing an annual budget, have your clients be entirely honest about the upcoming plan. A budget is only as strong as the underlying assumptions. Emphasize the notion that adding headcount is a massive addition to the budget. Help your clients realize that adding a staff member inherently does not guarantee the new costs will be covered by additional revenue or cost savings. Your client’s budget is only as strong as its long-term strategic planning, so ensure your client has an actionable plan that’s fairly represented in its budget.
There are huge risks to adding new employees. A great step to planning the financial changes of adding new team members is incorporating their impact into the annual budget. As you work with clients who are adding employees, be honest and incorporate the full impact of the addition. This leaves your clients with a fair and honest assessment of their future.