One of the questions I am frequently asked is ‘how do I know whether or not I can afford to hire a new employee?’ In the early days of running a business, taking on a new employee can feel like a really big step, especially when cash flow is tight.
But being short-staffed does more than just increase the workload and stress for you and your team. It can limit your business growth potential as you are forced to turn away business opportunities because you physically cannot take on more work. It can also eat into your profits if you and your too-busy employees make costly mistakes, cut corners to keep up with their workloads and skimp on customer service.
Recruiting is time-consuming and expensive. So before you decide to hire a new employee, follow this advice to make sure you definitely can afford it.
1. Decide On Your Remuneration Policy
How do you want to remunerate your employees? Answering this question goes to the heart of your company culture and values, and sets the framework for the type of employer you want to be.
My policy is to pay top of the market because I want to attract outstanding employees. This is because:
- In my experience, one outstanding employee gets more done than two average employees.
- It is easier to retain your best staff if they are well remunerated. This saves recruitment costs further down the line.
- Recruiting, inducting and training new employees is a substantial investment of company time. Once I’ve ‘got the right people on the bus,’ I want to keep them.
- Financially, it is harder to introduce a ‘top of the market’ policy further down the line.
2. Have 3 Months Salary In The Bank
With cash flow on a knife edge in most businesses, it makes sense to have three months worth of salary set aside to fund the wages of your new recruit. This helps to manage the risk that you cannot afford to keep your new employee if you hit a cash dip.
This also takes account of the the fact that your new recruit will, depending on the nature of the job, take anything from a few days or weeks to get fully up to speed with their new role. You (or one of your team) will also be spending time training the new recruit up, and may have less time for business development activities.
3. Prepare A Weekly Cash Flow Forecast
Your cash flow forecast will tell you if, and when, you can afford to take on an employee. Build out a weekly cash flow forecast, and use this to identify whether there are any cash dips ahead. Plug these cash gaps by closing as many sales as you possibly can. If you’re in a service based business, make sure that you are paid a deposit if you don’t take full payment up front. Once somebody has paid a deposit, it is much less likely that the work will not proceed.
4. Estimate Your Future Sales
Take your monthly profits from the last few months and project forward at least 12 months. Review any big deals you have pending that you are likely to 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 afford a new hire or if you should wait until things pick up.
5. You Only Have To Find One Month’s Worth Of Salary At A Time
Go back to your cash flow forecast, and check whether you expect to make enough sales to pay your new recruit’s salary for the first 6 months. If you cannot, go back to your sales pipeline and check it is filled with enough quality prospects to generate the level of sales you will need.
6. Evaluate Your Profit Margin
For every pound you spend, how much do you actually get to keep? If you have experienced losses over the last several months, you probably cannot afford to hire an employee. But if you add the cost of your new employee to your overhead expenses and estimate that you will still turn a profit, you can feel confident that you can add staff. Just remember not to tap into your cash reserves entirely. You make sure you have cash on hand so that you can afford to cover the unexpected.
If, after all of these calculations, you decide you cannot afford to hire a full-time employee right now, you do have other options. Hire a freelancer, contract worker, temporary employee, or part-time employee. That way you can spend as much as you can afford right now, and still get some needed support.
Join The Conversation
Question: What’s given you the confidence to know you can afford to hire a new employee? I love reading your feedback so please do take a moment to share how you’re going to use this in the comments box below.
Explore These Additional Resources
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- The Secret To Cash Flow Success
- What Makes A Good Employee?
- 4 Essential Habits For Achieving Consistent Business Results
Work With Me
I’m Denyse Whillier, a Sussex and London based business coach and consultant. I work with responsible businesses to build profitable and successful brands of the future. To do so, I draw on Built To Succeed™, my proven success system, developed during my 8 years in the trenches as a CEO.
I’d love to start a conversation about whether we’re a good fit to work together. Simply use this link to arrange an informal Skype coffee chat. There’s no hard sell. Just solid advice and a straightforward, honest assessment of whether 1:1 business coaching (or business consultancy) would be right for you.
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