What Does Your Next Employee Really Cost?
What Does Your Next Employee Really Cost?
Hiring another employee can be an important step in the growth of a business.
But when considering whether the business can afford a new member of staff, salary is only the starting point.
A headline salary of €50,000 can translate into a total employment cost comfortably above €60,000 when the other costs of employing somebody are considered.
For SMEs in Gorey, Wexford and across Leinster, understanding that full cost can make recruitment decisions considerably easier.
What should employers include?
Depending on the employee and business, costs can include:
gross salary;
employer PRSI;
employer pension or MyFutureFund contributions where applicable;
laptop, phone and other equipment;
software licences;
recruitment costs;
onboarding and training;
insurance;
additional employee benefits; and
other employment-related overheads.
The exact cost will vary considerably between businesses.
That is why using salary alone in a budget can understate the real financial impact of the hire.
The bigger question is return on investment
Calculating the cost is only half of the exercise.
A business owner should also ask:
What will this employee enable the business to do that it cannot do today?
For example, the new employee might:
generate additional sales;
increase production capacity;
improve customer service;
reduce reliance on subcontractors; or
free the owner to concentrate on higher-value activity.
The objective is not simply to minimise employment costs.
It is to determine whether the commercial return from the hire justifies the total cost.
How much extra revenue is required?
Suppose a new employee costs the business €65,000 a year.
That does not necessarily mean an additional €65,000 of sales will cover the cost.
If the business operates at a 40% gross margin, it may require substantially more additional revenue to generate enough gross profit to absorb the employment cost.
This is where budgeting and financial modelling become particularly useful.
Don’t forget cash flow
Even where a hire makes sense from a profitability perspective, the business also needs sufficient cash to support it.
Payroll represents a recurring commitment.
The employee needs to be paid regardless of whether customers are slow to pay or the business experiences a quieter month.
Before recruiting, it can therefore be useful to incorporate the new employee into a cash-flow forecast and model the effect on the business over the next 12 months.
Business planning support in Gorey and Wexford
Podium Finance works with SMEs and owner-managed businesses in Gorey, Wexford and across Leinster on budgeting, financial forecasting and commercial decision-making.
If you are considering expanding your team, we can help you understand the full cost of the hire, the additional revenue required and the likely effect on profitability and cash flow.
