How to calculate the cost vs. benefit of hiring
As with all major business decisions, like relocating or targeting new clientele, hiring comes with both risks and rewards. It takes money to find, recruit, and train talented employees, but the right hire can pay dividends long-term.
Before you make a decision, take some time to evaluate the cost vs. benefit of hiring.
Keep in mind that the costs of hiring aren’t limited to a potential employee’s salary. Health insurance, payroll tax, and worker’s compensation insurance are all factors, as are benefits like paid vacation and bonuses, which go a long way in retaining good employees.
After factoring in employment taxes and benefits, most employees end up costing anywhere from 1.25 to 1.4 times their base salary. So, if an employee’s salary is $50K, you could actually end up spending anywhere from $62.5K to $70K on that person each year.
Another costly component is the time it takes to hire. Not only do you need to create and pay for job advertisements, but you or someone from your team also has to set aside their regular work to sort through job applications, schedule and conduct interviews, evaluate potential candidates, negotiate pay, and lead training. And this process can be lengthy. Research shows that the average job interview process in the U.S. takes nearly 24 days.
The benefits of hiring, however, might outweigh the costs. A good hire has the potential to take your business to the next level by earning big money for the company, bringing in new customers, or facilitating day-to-day operations. If you’re struggling to manage your current workload, or have to turn down projects because you don’t have enough resources, hiring someone can help ease your stress and free you up to accept new opportunities.
What is your ROI?
To figure out whether hiring is worth it, you need to have a clear understanding of the role you want to fill. Start by compiling a list of tasks you need assistance with, including everyday work like fielding customer service calls, as well as larger projects like planning an annual conference. Once you specify what a potential employee would do for the company on a regular basis, you can better determine your return on investment (ROI).
First, though, it helps to have an idea of your turnover rate, which is the rate at which employees quit or get fired. To calculate this number, divide the number of employees who’ve left in the past year by the average number of employees in the business, then multiply this number by 100. If five employees left in the last 12 months, and you have an average of 50 people at your company, then your turnover rate is 10 percent, which is considered fairly normal. The lower you can get your turnover rate, however, the better your employee ROI. If you have an unusually high turnover rate, it may be a sign you need to spend more time on your hiring process or culture.
There are two different ways employees can contribute to a business’ bottom line: directly or indirectly. To determine the ROI for either type of employee, first start by estimating the cost of hiring (including employee salary plus benefits, as well as the number of hours it takes to hire). From there, you’ll need to evaluate based on different factors.
If you’re hiring an employee who’ll be directly responsible for bringing in money, like a salesperson, the main question to answer is whether they’ll be able to meet (or exceed) sales quotas.
Once you calculate the estimated the cost of hiring, check your sales targets and figure out how much money you’d like the employee to bring in. Then, subtract the estimated cost of hiring from the amount of revenue the employee could generate.
Someone who helps the business indirectly, like a project manager or office admin, may be more difficult to assess. To evaluate positions like this, you need to ask yourself a couple questions. Would the role you’re hiring for save you time and energy? Would it allow you to accept bigger projects, serve more clients, develop more products, focus on customer satisfaction, or help the business run more smoothly?
Say, for instance, that you bill clients for your time at a rate of $100 per hour. If hiring a project manager to coordinate with clients would save you an estimated 30 hours a month, then you could potentially take on more work and bill for $3K more each month. That’s $36K more a year, but this number may not seem impressive when subtracted from the estimated cost of hiring. If you end up with a negative figure after doing the math, you may decide hiring isn’t worth it.
Of course, performance isn’t the only thing that matters when hiring. An employee’s personality, talent, initiative, and team cooperation go a long way, as does their ability to successfully juggle multiple responsibilities. These factors are harder to quantify, which is why determining employee ROI is not an exact science.
Ultimately, however, if the amount of help a new hire can offer appears greater than the cost of recruiting, it’s worth it. If the time and money you’ll put into hiring won’t yield a great ROI, but you still need help, consider hiring a part-time employee or contractor instead.
If you decide hiring is the right move for you, Funding Circle can help with financing. Our loans are designed to help small business owners grow their operations with ease. Applying is simple and you can get a decision in as little as 24 hours. Learn more or see how we compare to other lenders.