For a small business, hiring a new employee is a big deal. It is a major investment and also an exciting milestone. Adding staff means you’re growing and potentially increasing revenue.
But there is more to the financial side of adding an employee than just being sure you can afford the additional salary and benefits. That’s just the beginning.
There are numerous other costs:
Recruiting: Whether this is in-house or using a search firm, you’ll incur expenses.
Onboarding: This includes interview time, new equipment, and software licenses.
Training: Investing time and resources to get them up to speed.
Ramp-up Period: It takes time for new hires to reach peak productivity.
There’s also the unfortunate, but real possibility you’ll have a do-over hire, if the first person you put in the new position just didn’t work out. This could double your costs, plus the cost of wasted salary while that non-productive person was employed.
These expenses eat into your cash flow before you see any return on investment. Cash is the lifeblood of your company, essential for covering operating expenses, paying bills, and managing unexpected costs. So, you need to guard it very carefully. (Do you know how to read your cash flow statement?)
If you hire someone without enough reserves, and then a slow month hits, you won’t be able to cover salaries on top of your regular expenses.
According to the book Simple Numbers, by Greg Crabtree, which we use as a foundation of our philosophy here at SBS Accounting & Advisors, you can’t just forecast when you’ll get back to your original net income after a new hire. (You will likely see a dip in net income for some amount of time after hiring the new employee.)
Instead, you keep front and center the impact of this new hire on cash. Factor in, on a monthly basis, how the new salary and other related expenses will affect cash flow and capital requirements.
Your forecast should answer questions like: How much of a hit to your cash flow will the new employee be in the short term? How long will it take to gain expected optimal revenue from the new hire? When you will get back to your target pretax profit?
Hiring a new employee is an exciting step for your business, but it requires financial prudence.
How much in cash reserves do you need, then? While it depends on numerous variables, ultimately if you’ve built your cash forecast as we’ve outlined above, you’ll have your answer. To discuss your particular situation and how to map out this step forward for your company, contact us at info@sbsaccountants.com or 770-284-5537 today for a consultation.