I know exactly where you are, my friend.
You’ve worked hard to grow your business. Things are clicking along, and it’s time to hire a new team member to help you keep up with all the work clients keep throwing your way. What’s the next step?
Well, first off, take a minute to congratulate yourself! This is an exciting time for you and your business, and you deserve a pat on the back. (Here’s one from me too!)
OK, now it’s time to chat with your bookkeeping big sis (it’s me, hi 👋). As exciting as it is to be here, take a beat before you hop over to LinkedIn to start looking for candidates. There are some essential financial questions you need to ask yourself first.
And it’s more than making sure a new employee’s salary fits in your budget. There are other financial considerations too!
So get comfy, pull your last P&L (or even better, a Cash Summary), and settle in. Let’s talk about the questions you should ask yourself before hiring a new team member. Ready? Let’s go!
In other words, will hiring a new team member save you money overall? It might seem counterintuitive — we’re talking about spending more money to pay someone, so how could that save you money?
Because right now someone else in your company is doing the work you’re considering outsourcing. And if that person is you, think about how much you pay yourself to do those tasks. If your hourly rate is higher than what you would need to pay a new employee, hiring them would save you money!
Not sure what your hourly rate is? That’s OK! Most CEOs have multiple tasks, and not all of them “cost” the same amount. For example, you might charge $200 for an hour-long call with one of your clients, but the hour you spend going through your inbox might not be “worth” the same amount. You might want to go with an “average” hourly rate that’s somewhere in the middle.
Now, let’s think about it another way. If you hire a new team member, what could you do with that time you’ll get back?
So, start by doing the simple calculation of comparing your hourly rate to a potential new team member’s, but don’t stop there. Think about everything you could do with that time you’d be getting back. Is the value of those activities enough to offset the cost of your new employee?
Remember, you don’t have to use all that time for work. It’s perfectly fine to take a little time to rest, simplify your schedule, or focus on self-care to prevent burnout.
Now let’s run the numbers to figure out how much you’d actually be paying a new team member. What’s the going rate in the industry for the role you want to fill?
Do some research! Check out job boards, look up websites or blogs by industry professionals, and maybe even check in with some of your peers to get their perspectives.
Don’t rule out the idea of paying a little above the average rate. If you can find someone who brings a high level of value and/or niche skills to the table, the benefits to your business may be worth the higher cost.
Heads up! This question only applies if you’re thinking about hiring an employee. If you plan to outsource to a contractor, skip to the next question.
Remember, paying an employee involves more than just covering their salary. Unless you want some uncomfortable attention from the IRS, you also need to cover payroll taxes for your employees.
And taxes aren’t the only additional costs, especially if it’s important to you to treat your employees well (and avoid feeding into that toxic corporate culture). So don’t forget to calculate additional costs:
Of course, you’re not required to offer all these benefits. So decide which ones are important to you, and factor those costs into your calculations.
Not sure how to figure out the costs of those benefits? See if your payroll provider can help! Here at Madison Dearly Bookkeeping, we love Gusto! This provider makes it super easy to find quotes for benefits and then handles all the behind-the-scenes aspects of running payroll.
Hiring a new team member should be more than just a bandaid to give you more capacity when you have too much work to handle on your own. Ideally, this decision should lead to more time and more revenue.
Think about it this way. If a task takes you a long time and a VA could do it faster, hiring them saves you time. And if that VA’s rate is less than your hourly rate, hiring them also saves you money. In this situation, hiring is a very profitable move for your business.
Time profitability is sometimes a little harder to calculate than financial profitability. I like to think about time in terms of Zone of Competence vs. Zone of Genius. Tasks that are in your Zone of Competence are those things that you can do, but they take a long time and you don’t like doing them. Zone of Genius tasks, on the other hand, are the things you love doing — work that you can complete efficiently because you enjoy it and are really good at it.
Generally, it’s a good idea to outsource those Zone of Competence tasks that are someone else’s Zone of Genius. Then, you get the ideal situation where everyone does what they are best at and enjoy.
All right, now it’s time to reference that P&L or Cash Summary you pulled earlier. A Cash Summary makes this calculation easier because it shows all of your financial transactions.
If you only have a P&L, remember to account for the expenses that don’t show up there, like credit card payments, owner’s draws, and taxes.
So, let’s take that report and look at the basics: money in, money out, and how much is left over. If possible, look at a yearly report and find the month with the lowest profit (least amount left over). In that month, could you have afforded to cover the cost of the role you’re considering hiring?
For example, let’s say you’re considering hiring a VA at a monthly cost of $600. If you still have $1,000 left over in your lowest-profit month, you can feel fairly confident that you can cover the cost of this new team member.
If your average monthly profit is higher than that low point, you’ve got even more of a cushion!
Now, if your monthly profit doesn’t cover the cost of the role you want to hire for, it’s time to set some goals and create a budget to meet them.
Phew, this was a lot! And I know it might feel like I’m just making your hiring decision way too complicated. But the last thing you want to do is bring on a new team member only to let them go a few months later because you realized you couldn’t afford it.
Like every business decision, it all comes back to your bookkeeping 😉 If you’ve got up-to-date books and easy-to-read reports, you’ve got all the info you need to make big decisions like this. Don’t have those things? No worries — my team and I would love to help!
At Madison Dearly Bookkeeping, we really care about each of our clients. It’s not just about the numbers and spreadsheets for us — we’re here to make it easier for you to understand and manage your business finances.
We’ll track your transactions and keep your books updated, of course. But that’s just the beginning. We also give you clear, readable (and pretty!) reports that explain your numbers the way you see them. Plus, you’ll get customized quarterly Loom videos walking you through complex topics. And you can always reach out to the team on Voxer.
Sound like the kind of support you want?