It’s a common question for business owners: Can I afford to hire more employees?
Having more help should make it easier to grow your business, but it also means higher payroll and more risk. How much money will it take? How much risk? Doing some numbers will help you decide.
You’ll still deal with a certain level of uncertainty and guessing, but having a good sense of your cash flow and other financials can help you break down the decision so you can examine it in a more meaningful level of detail.
In my experience, it’s easier to visualize these uncertainties when you break them down into components first. Here’s a process to use when you want to use data—your business’s financials—to help you decide whether or not you should hire more employees.
Step 1: Define your objectives
Whether or not to hire should never be a generic question. It’s always about hiring for specific skills and abilities that address your company’s specific needs. That means you need to put some numbers behind your rationale.
Different kinds of hires come with different underlying assumptions. For example:
- Short term growth. Some hires are about increasing your revenue in the short term. More salespeople is an obvious example. More people answering the toll-free sales lines are another example.
- Long term growth. Others are about increasing revenue over a longer-term—people involved in product development and marketers come to mind. Better or increased product development presumably gives your business more to sell. Marketing is not as immediate as sales, but presumably increases the numbers of people who know, like, and trust your brand over time.
- Decreasing costs. Some hires are about decreasing costs or expenses. A classic example is bringing shrink wrapping or packaging in-house after it reaches enough volume to make this more economical than paying an outside service. Your goal is to address challenges that emerge as your business grows and scales.
Step 2: Estimate monthly financials
Focus on what’s going to change according to your best information. You know your business so you can make some educated guesses.
Estimate financials using spreadsheets
Start with some convenient form of row and columns like in a spreadsheet (if you are using LivePlan, skip to the LivePlan recommendation below the spreadsheet illustration).
Set months in the columns along the top of your spreadsheet, leaving the leftmost column blank.
Use that leftmost column to name or identify the rows below, each with estimates for the upcoming months.
First, use rows to lay out the gains you estimate from hiring. That’s all from your specific business objective in the first step—sales, costs, expenses, or whatever the benefit objective is.
Think it through, month by month. Make realistic estimates. It’s easy to just type numbers in a spreadsheet, but useless if you’re kidding yourself.
Second, in rows below these first rows, lay out your monthly costs for hiring. Include estimated compensation, benefits, and commissions if there will be any. You can do simple math to link estimated commissions to estimated sales.
Third, do the math. Do the benefits outweigh the costs? How many months does it take for that to happen? How long before you break even?
Or Use LivePlan forecast scenarios to model or estimate financials
If you’re using LivePlan then you can use the create new forecast feature to create one or more new scenarios to manage your educated guesses.
When you create a new forecast, it starts with all the numbers you already have filled in. You can then go to the Personnel section and add personnel to reflect your new scenario, and then go to the Revenue, Direct Costs, and Expenses tabs to change your assumptions in those areas.
Then, compare the new scenario forecast, with the new personnel added to the existing forecast, without the new personnel.
Step 3: Serious reality check
Don’t just believe your numbers with one pass. This is your business. Test your assumptions.
For example, look hard at how many months it takes a salesperson to get up to speed with your business and customers. Look too at the tendency of salespeople to overestimate sales and underestimate the time it takes.
Maybe you should push your estimated sales a few months further into the future. Maybe you should do the same with the cost savings.
Make sure to check your cash flow, not just profits. Your cash flow has to be able to pay employees right on time, even if the money from incremental sales takes months to flow in as your customers pay their bills.
If you’re using a spreadsheet, then keep cash in mind as you lay out assumptions. Do you have a cash flow spreadsheet? Have you adjusted it to see what happens? If you are using LivePlan, then your cash flow projections will automatically adjust to your new scenario, using your cash flow assumptions.
Vary your scenarios. Remind yourself that you are just guessing. Does your initial analysis show only slight gains from the new hires? Ask yourself how sure you are. What if your estimates are off by half? Are you still better off?
You can also consider some alternative tactics. For example, in some cases, you could hire someone temporarily as a contractor or consultant, without the promise of long term or expense of employee benefits (but make sure you follow employment law and ethical practices). If they seem right for the long term, you hire them. If not, you don’t. And you can hire somebody part-time, in some cases. Or for a specific project.
Consider your peace of mind. Employees are fixed costs, real obligations, and extra risk. Are you comfortable with that? Do the gains you estimate justify the extra spending and extra risk?
Does this really work?
If you’re a business owner, you live with uncertainty. This process has helped me many times, as I grew a financially independent business from zero to multi-million-dollar sales. I like breaking my uncertainty into pieces.
However, like almost everything in business analysis, the results are only as good as your assumptions. You know yourself—how good are your estimates? Do you tend to be too optimistic or too pessimistic? In the end, it’s your business. Do your numbers as accurately as you can, and they can help you run it better.
Editor’s note: This article originally published in 2017. It was updated in 2019.