It’s one of the most common questions I get asked by my clients.
For founders who want to grow their business, building a team is a common challenge.
The eventual goal is to often build themselves out of the day-to-day to get some more freedom in their lives.
BEFORE YOU HIRE:
Make sure you question what return on investment you are getting from this hire. Are they doing billable work?
Can I afford it?
You should be hiring from a position of strength, the business should be able to sustain this extra wage. Hires are often made in periods of growth and expansion for this reason.
The simplest way to work this out is to work out your total monthly commitment for this person and TEST it. For a few months, transfer their total wage amount including relevant taxes to a separate saving account and leave it there.
Did you start to run low on cash in other areas, or was the business able to sustain this drop in available cash? That’s a good sign you might be able to afford it.
As a general rule: If you are making < 10% net profit (EBITDA) then hiring a new full-time staff member is fairly risky, and not advised.
You want to be consistently making between 10-15% net profit in order to sustain the new hire, as this increased wage expense will drop your profits down.
This impact on profitability is impacted by the type of hire you are planning, for example, an expensive middle management hire is a much bigger drain on your profitability than a technician who will be focused full time on client work.
You may notice in a recession or downturn that middle management are usually the first to be trimmed as a result.
Use some frameworks to help with your decision:
There is a range of frameworks that will help you test if you really need to hire someone, and if you can afford it.
Perhaps you just need to just get better performance from your current team? Or perhaps you need to increase your prices first before you can afford to?
Your team might be busy doing out-of-scope work for that pain-in-the-arse client nobody likes because the account manager is scared to have a tough conversation to increase their price or reset expectations.
Here are a few as a guide:
> Staff costs as % of Revenue: ideally your total wage bill should be < 50% of your revenue. You need to leave some cash for other overheads, your subcontractors and then 10-30% of profits.
> 70/30 rule: As a rough guide, you want at least 70% of your overall team doing billable work, with the remaining 30% can be for non-billable team.
> Utilisation: there are a few ways to calculate this but on an agency-wide basis you want people working > 50% of their available time on revenue-producing work. Will be higher for technicians, and lower for management.
>High hourly charge out rate: Definitely > $150 and ideally pushing up to the $250/hour mark
>Build out your teams in “Pods”: It might be that X10 clients can be serviced by X1 Account Manager with the support of X4 technicians. This is a mini pod and once your client list grows you can build another one with the right mix of Clients / Managers / Technicians.
Find the ratio that is the most profitable without overworking your team – that happy balance.
Why these frameworks?
These frameworks help you make sure you’re getting the most bang for your buck when paying your team.
Here are some common problems with staff and how they manifest in your metrics
- Literally do no work and watch cat videos (low utilization)
- Work way too long on your lowest paying client to look busy (high utilziation but overservicing so unprofitable clients)
- Too many managers, not enough technicians: your 70/30 split will be off
- Headcount is too high for your current pricing/client mix: Your staff costs as % of Revenue will be too high
Forecast it out
The more complex way to decide if you can hire, is to run a cashflow forecast at your estimated revenue levels and the new wage bill with the hire. This will help you map out month by month the impact on your cash.
This is what we do with our clients to make sure we are 100% confident the business can sustain the wage – so you can hire with confidence.
Be sure to include any additional costs for the hire such as another laptop, increase software expenses or additional rent if you need to hire a new desk at your co-working space.
The ideal situation to hire someone is when you are consistently profitable (>10% net profit), have stable cash flows, and have a clear vision for what ROI you are getting from the new hire to drive the business forward.
As a rough guide for budget, your total staff wage bill should not be making up more than 50% of the total revenue each month.