When a small business employs another person it can be a very big decision. If you are fan of statistics, you can make it sound very impressive. I grew my company by 25 percent last quarter. Really, what did you do? “Oh, I employed my fourth team member!”
When a large business employs another person the decision can be far less significant. For example, if they already have 100 employees and then hire one more the impact on the increase in wages is minimal.
Recruiting the right person in any business is crucial, however in a small business, this decision can have a huge impact on the bottom line almost immediately.
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Use an indicator.
A great way to get meaningful information is to use a ratio known as “wages to revenue.” In other words, you divide the amount you are paying out in wages by your total income. If wages to revenue is trending up this could be a good indication that you are overstaffed, or that you may be understaffed and are paying out lots of extra wages in overtime.
If it is trending down this could be a great sign, however you also need to beware that your staff aren’t being over worked, or that they are becoming fatigued, often signaled by a drop in service levels and quality.
Benchmarks vs. averages vs. ranges.
Clients often ask me what is considered a good wages-to-revenue ratio? There are a number of industry benchmarks that you can refer to. However, benchmarking data is made up of both great businesses and bad businesses. It’s a bit like asking what is the average price of a house in a neighborhood. It could include the multimillion dollar mansions right down to a dilapidated old house. Benchmarking data is just a starting point.
A couple of years ago I was working with four businesses, all part of the same franchise. Even their figures differed quite significantly, and it was because of the way each owner chose to run their business. An acceptable range differs from business to business, so rely on your firm's average.
Analyze the trend.
Once you have established an average and can see which way the numbers are trending over time, then you can consider the following three points:
- Is this just a short-term occurrence in an increase in workload or a particular project? If it is, you might be better off not hiring that extra person.
- Is this a seasonal fluctuation and can you see some quieter periods coming up? If this is the case, you may be able to reach an arrangement with your team where you can offer time off in lieu. Just check you are staying on the right side of the law when doing this.
- Is this a long term trend and if so how can we increase current productivity? Look at how your workspace has been set up. Think about where there may be double handling and inefficiencies, and how you can better streamline processes and procedures. You may also consider whether it would be better long-term to invest in new equipment and technology to make things more efficient.
Determine the true cost.
If the answer is no to the questions above, then the next two questions you want to ask are:
- Will my wages-to-revenue ratio remain the same or even possibly decrease by employing an extra person? In other words, will this person help me make more money compared to the extra money I am paying out in wages to them.
- How long will it take? When employing a new person, it takes time to train them and for them to become a productive team member. By being realistic about what this timeframe is you can work out how much it is really going to cost to hire and whether it’s worth it.
When you are able to analyze some of the key numbers by looking at how they are trending you will be able to make better decisions. Get started today by tracking, either on a weekly or monthly basis, your wages-to-revenue ratio; that way, the next time you feel the need to employ someone you will be able to make an informed decision.
Bigger is not always better, and you want to make sure that employing an extra person makes good financial sense.