Can You Afford a New Employee?

by Jaimy Ford

4 min read

If you have more work than you can manage or your employees are claiming that they are completely overwhelmed, it may be time to increase your staff. Being short-staffed does more than just increase stress for you and your team. It can limit your growth potential as you are forced to forgo promising business opportunities because you simply can’t take on more work. In addition, it can eat into your bottom line when too-busy employees provide shoddy customer service, make costly mistakes, or cut corners to keep up with their workloads.

Still, don’t take hiring a new employee lightly. It’s time-consuming and expensive. So before you decide to beef up your staff, follow this advice to make sure you can actually afford it.

Calculate the Cost of a New Hire

The cost of a new employee goes way beyond the person’s salary. You will also need to be prepared to cover these costs:

  • Recruitment: You have to find the best candidate to fill the position, and the cost to do so will depend on your needs and how much time you have to spend on recruiting. You can post a cheap or free ad on Craigslist and other job sites, but then you will need to find the time to review dozens of resumes, many of which may be a poor fit for the job. Conversely, you can pay a recruitment firm a chunk of change — sometimes thousands of dollars — to post jobs, weed through the resumes, conduct initial interviews, and send you a list of the top candidates from which to choose.
  • Wages: Calculate the base salary or hourly wage you plan to pay the employee.
  • Benefits package: Determine what you will you pay for the employee’s health care plan, retirement plan, life insurance, and disability coverage.
  • Perks: If you provide free food and drinks, take your employees on team-building activities or to special events, or offer other perks, add up what those costs are per employee for the year. Then add that figure to a new employee’s total compensation package.
  • Payroll taxes: You will need to include the amount that you are required to pay toward Social Security, Medicare, and federal and state unemployment taxes.
  • Equipment and supplies: You may need to purchase new furniture, a computer, software, and other tools to accommodate a new hire if you don’t have them already. Even the cost of pens and paper can add up, so try to add in everything.
  • Training: If you don’t train employees thoroughly, don’t expect them to meet your expectations. You can hire expensive firms to facilitate training or invest in e-learning and other training programs. However, if you are like most small businesses, you will need to conduct the training or rely on an employee to do so. Essentially, you are paying someone to learn and others to teach, so put a price on what that will cost you.

Determine if a New Hire Is in Your Budget

Now that you know what a new employee will actually cost you, here’s how to determine if you can afford to hire one.

  • Estimate your future sales: Take your monthly profits from the last few months and project out at least 12 months. Review any big deals you have pending that will likely close, and estimate how many new customers you will be able to bring in. While anything can happen, and you could come in under — or over — your estimated projections, a sales forecast will tell if you can swing a new hire or if you should wait until things pick up.
  • Project how much revenue a new hire will bring in: For example, what is realistic for a new sales rep to generate in the first month or year? How much more product could you produce if you increase the number of workers in your warehouse? Or how many more customers could you serve if you hire more front-line staff? Just remember that in most cases, it will take a bit of time for employees to reach their full money-generating potential. That’s why it is critical to confirm that you can cover the cost of a new hire even if that person doesn’t don’t immediately contribute to the bottom line.
  • Evaluate your profit margin: For every dollar you spend, how much do you actually get to keep? If you have experienced losses over the last several months, you likely can’t afford to hire another employee. But if you add the cost of your new employee to your overhead expenses and you estimate that you will still turn a profit, you can feel confident that you can add staff. Just remember that you don’t want to tap your cash reserves entirely. Equipment breaks down, inventory is accidentally destroyed, and other issues arise; make sure you have cash on hand so that you can cover the unexpected.

If, after all of these calculations, you decide you just can’t afford to hire a full-time employee right now, you do have other options. Hire a freelancer, contract worker, temporary employee, or part-time staffer to come in and alleviate some of the burden you and your employees are feeling. You can spend as much as you can afford, and still get some needed support.

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