The Secret to Hiring an Employee

Your business is growing…, you’re turning away work because you can’t keep up with the demand. This is quite the conundrum of business ownership (yes, I did use conundrum because I love the way it sounds). This is one of the best problems to have. But how do you really know when to hire an employee…..Without going broke in the process.

Hiring an employee is scary, most of the time it’s confusing you have many questions so we’re going to break it down to a science because I love numbers. First, though let me say that hiring an employee is complicated so we’ve broken it down into several parts. Which we’ll be coming out over the next couple of weeks.

 We’ll be using some handy tools which will help you figure out if you’re ready to hire your first employee. First things first, now is the time to see if you’re even ready to hire.

Keep your payroll forms up to date with this payroll pack

Get the calculator and all the form you need to keep your employee information and keep them compliant for the government.

Your Employees WILL Make you Money

What a minute Andrea, you just listed all the expenses what do you mean my employees will make me money…. Is the most common question I get but guess what? All your employees whether they are direct labor (or labor that builds the product or provides the service) and indirect employees (managers and administration that don’t directly provide services).

Will make you money.

Hot Tip: If you’re confused about direct and indirect labor costs go read out article on Direct Labor

Every employee (including the owner) should expand your ability to service more clients and increase your revenue and profit.

Let me explain further.

If you hire someone to build a widget you’ve probably determined their cost in the price of your product (aka direct labor cost). Generally, small business owners neglect to include that their indirect staff will also make them money.

How you ask…..

They will free up the time for you to sell more, create new products or services and be able to service more clients/customers.

For every employee you have your profits should be increasing (after a training period).

We use a simple formula to evaluate this for every employee you hire you should be increasing your revenue by 3 times their salary +benefits + overhead.

If I hire an employee for $50,000 per year I would expect to bring in an additional $150,000 into my business once my employee is trained.

When You Should be Hiring an Employee

Let’s answer a few questions to see if you should hire an employee

1. Is your business is making a profit?
2. Are you turning down work?
3. Are your clients complaining about service?
4. Is the quality of your products or services starting to go down?
5. Is it taking too long to fulfill orders and is your waiting time for customers too long?

If you’ve answered yes to some of these questions and there are now no more ways to automate and streamline your processes then it may be time to start the search to hire your first or next employee.

There are however more things to consider and that is

DID YOU ANSWER YES TO NUMBER ONE?

Yes, I’m yelling at you.

If the first thing you haven’t considered is whether or not you’re making enough of a profit to not only hire an employee but…keep yourself paid then you need to rethink hiring and look to other ways to increase productivity.

Ok, I’ve made my point.

If you’re unsure whether you’ve made money or not, you need to stop what your doing and first start cleaning up your accounting. You will be in no position to hire anyone if you don’t know where your money is coming in and going out. You can check out our simple money series to organize and get this up and running.

Whew ok that one was a little tough love 😉 but don’t worry if you need some help you can always give us a call for a free consultation.

The Real Cost of Hiring an Employee (It’s not just salary)

Before going forward I want to discuss the pesky details of hiring an employee and what the cost is to you the employer.

Federal and State Taxes

You need to factor in the cost of the salary but also the payroll taxes you’ll need to pay, and payroll provider costs (otherwise known as payroll expenses). The cost of keeping compliant etc.

Your business will need to pay employment taxes this includes

• Medicare (FICA)
• Social Security (FICA)
• Federal Unemployment (FUTA)
• State Unemployment (SUTA)

Benefits

Will you be offering benefits like:

•  Sick Pay
• Vacation pay
• Health insurance
• Retirement compensation

Most first-time employers forget about the additional benefits you may (or not be offering your employee). Just remember employees will need time off too so you’ll want to plan to cover these costs. If you will not be offering health and retirement benefits expect a hire turnover rate. This will also decrease your chances of hiring people with experience so you may need to get creative.

As for vacation and sick pay aka PTO you need to account for times when they will be paid but will not be working. Obviously, if you’re hiring a part-time worker this may not apply but we’re really talking about hiring a second full-time employee. Keep these things in mind.

Additional Overhead

Whether you’re bringing people into a brick-and-mortar store or working remotely you’ll have increased overhead costs. Things like

Brick and Mortar office

• Furniture
• Benefits
• Utilities
• Security
• IT costs
• Phone Costs etc.
• Uniforms

Don’t worry below we’ll help you determine what those costs are.

Remote Employees

• IT costs
• Phone Costs
• IT Security costs

Just to name a few.

You’ll want to figure out how much it will cost you. Do you need to buy them a laptop? A phone?

Software subscriptions and email addresses? These things all come into play when you hire. List out what you’ll need once you onboard so you can figure out the true cost of hiring an employee.

You can use this Payroll Calculator to help you figure out the costs.

Quick tip: Even if you hire a contractor for a role, you’ll want to include the additional cost of software and anything they may need to do the job you hire them to do.

The Simplest Way to Determine When your Ready to Hire an Employee

Now you know what hiring a new employee is going to cost you on an annual basis for the overhead you’ll need to determine their salary or an hourly wage.

For example, let’s say you’re going to hire a graphic designer.

You need to determine how much the salary for the graphic designer is. The easiest way is to go to Salary.com and enter their title and how much experience you want to hire. In the next lesson we’ll discuss more in-depth on hiring when you want inexperience vs. experienced employees but for now… let’s just say you want a graphic designer with 3 to 5 years of experience.

According to salary.com, a graphic designer can make somewhere between 62,000 a year and 94,000 a year. A lot of this depends on location someone in New York will make more than someone in Texas.

Don’t make this too complicated just look to the location and then the median salary and start there.

Step 1: Determine the Annual Salary

We’re going to use $55,000 for this example.  Now divide their salary by 12.

Step 2: Add payroll taxes and benefits as a monthly cost

We’re going to use the standard employer payroll costs. Including some healthcare costs just to make it more fun. We came up with $736.00 per month (don’t worry I’ll show you how to do this.)

Step 3:  Figure out your monthly and annual overhead

We’ve added overhead monthly costs. Basically, this is anything that will increase monthly See examples above. We came up with an additional $81.00 per month.

Add in any one-time charges and divide by 12 (for the first year).

We came up with some additional overhead like a laptop and a phone for $158.00

Step 4: Add up the costs

Once you get the figures you can add up your monthly costs.  For this example, we’ve come up with a grand total of $5,558 per month in additional costs for a full-time employee.

Now we have all the costs associated with hiring a new employee.

Can You Start Hiring an Employee? (the easy way)

You have the cost.

Now can you set aside the money today for the next two to three months?

If you can set aside the money each month without it affecting YOUR OWN PAY and you can still pay all your current overhead expenses then….

Your ready to hire an employee

If however, you can’t set the money aside or it affects your pay or expenses, you may not quite be ready to hire an employee. You’ll need to find a way to reduce your expenses or increase pricing until you can get to that point.

If you need a little help figuring this out read our articles on How to Ruthlessly Cut Your Expenses and the Art and Science of Pricing.

Keep your payroll forms up to date with this payroll pack

Get the calculator and all the form you need to keep your employee information and keep them compliant for the government.

Putting it All Together

Believe it or not but your employees will make you money. Don’t be fooled into thinking that they are a cost only. Next, you should find out if you are ready to hire by answering a few questions. When working on the cost of hiring an employee make sure that you include all costs like Salary + Taxes + Benefits + Overhead. Once you’ve determined their monthly cost set aside the amount for a minimum of two months. Then check out our next article on the Paperwork needed to onboard your new employee.

Cheers!