Can I afford to hire more employees? Doing some numbers will help you decide.
You’ll still be stuck with uncertainty and guessing, but at least you can break that uncertainty down into more meaningful levels of detail. In my experience, it’s easier to visualize these guesses when you first break them down into components.
Here’s a process to use when you want your numbers to help you decide whether or not you should hire more employees.
Step 1: Define your objectives
Hiring or not isn’t ever a generic question. It’s always about hiring specific kinds of skills and abilities to fill specific needs. That means you need to put some numbers behind your rationale.
Different kinds of hires come with different underlying assumptions. For example:
- 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.
- 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.
- 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.
Step 2: Estimate monthly numbers
Focus on what’s going to change according to your best guess. Start with some convenient form of row and columns like in a spreadsheet. Set months in the columns along the top, leaving the leftmost column blank. Leave that leftmost column to 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?
Step 3: Serious reality check
Don’t just believe your numbers with one pass. This is your business. Test your assumptions.
Consider timing. 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 sales people 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.
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?
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 business from zero to multi-million-dollar sales and financially independent. 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.