Can I Afford an Employee?

Small Business
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Can I Afford an Employee?

There’s more to deciding to hire an employee than simply figuring out whether you have enough money for the payroll and the benefits. You also need to have the bandwidth to manage a new person and be able to explain how the business works and what his or her tasks are.

You’ll have to spend time training and, in the early days, correcting employee errors, but hiring is a necessary investment once a small business gets going. You’ll still have to wear many hats in a given day, but you don’t want to become swamped and unproductive. Some indications you’re ready to hire an employee include having:

  • Too much incoming work. If you find every day overwhelming, whether you’re working or thinking of work, then running your business as you are might be unsustainable. If you’re saying no to more clients, it might be time to hire some help.
  • No time to grow the business. Another effect of having too much business is not having the time to market yourself or your company mission properly. If your customer base stays low or declines, it’s time to hire.
  • Too much time and effort spent outside the core business. Your primary objective is to run a successful business, so if you have to constantly stop and handle administrative work, you can lose sight of your goal, according to Victoria Cabanos, managing principal of construction cost concern Stuart-Lynn Company. “There simply weren’t enough hours in the day to answer phones, lick stamps and give client presentations,” she says.
  • A stable cash flow. Whether or not your company is profitable, you need to make sure a prospective employee can count on a steady paycheck. You don’t want to be in a situation a year on in which you can’t support the new hire. This could hurt your reputation and make the time and effort you invested in training the employee feel like a waste.

Time and money, the common threads above, are your two most valuable resources. Once you’ve decided to hire someone, keep in mind the variety of costs that come with each new worker. They can add up quickly. Here’s a breakdown of some of the costs:

Payroll

Worker payroll, whether hourly wages or salary, is the biggest expense when hiring an employee. There’s no one answer to what that cost will be since the pay depends on industry, expertise and other factors.

Benefits

Offering benefits is not mandatory for businesses that employ fewer than 50 people, but if you want to compete for top talent in your industry, you’ll want to provide them. Among benefits, health insurance is one of the most desirable from an employee’s point of view. But finding the right plans to offer your workers can be difficult. One good place to start your search is the Small Business Health Insurance Marketplace, which offers group plans and tax credits through the Affordable Care Act. Employee benefits typically add between 20% and 40% to a worker’s base salary, says Mathew Dahlberg, an investment advisor and owner of 111th Street Investments in Kansas City, Missouri.

Workplace costs

Providing employees with the space, tools and equipment they need to do their jobs well is essential, but can be pricey. The exact cost depends on where your business is located and what sort of tools and equipment your workers need. At one end of the spectrum, office space in New York City is among the most expensive in the world. “Just renting desk space can be $1,000 a person” because of Manhattan real estate prices, Cabanos says.

Growth costs

When a company grows and becomes more profitable, the costs also increase. One area that can quickly get expensive is computer and server equipment as well as IT support at Internet companies. Another cost that’s likely to rise as your business grows is insurance. These costs increase based on changes in revenue, number of employees and other factors.

As you expand, a move to a bigger office is yet another expense. Tony Wilbert, founding principal of Atlanta-based PR firm the Wilbert Group, started the company with his wife in a client’s office space. When they grew big enough to move out, getting a central location downtown was important to attract younger employees who used public transit and to make it convenient for clients who wanted to visit.

Cost of employee turnover

Certainly, the time lost to training and maintaining an employee who doesn’t work out is one thing, but some employee turnover is part of the business. For restaurant owners like Matt Sin, of Foundation Restaurant & Bar in Sacramento, California, seasonal hires are expected, especially during the year-end holidays.

“In the end,” investment advisor Dahlberg says, “for businesses with employees, the cost of labor will consistently be the No. 1 expense.” Knowing if you can afford employees is a crucial step to building out a great company. For more guidance on hiring your first employee, see the Small Business Administration website.


Image via iStock.