Cash Flow Planning: Can You Afford to Hire an Employee?

August 5, 2021 - 8 minutes read
cash flow planning

Business growth requires you to hire new employees. Talent needs to grow and change, and when your current workforce cannot help you continue to grow, hiring is a necessity. But you have to ask yourself: can you afford to hire an employee?

Salary is just one of the costs to consider. In 2019, businesses spent an average of $1,286 per year training their employees.

When you hire a new employee, you also have to consider the costs of benefits into the equation and potential turnover. Cash flow planning can help you understand whether you can really afford a new employee or if it’s best to find internal means to fill content gaps.

Schedule a call with us to discuss your business and planning around cash flow, budgeting and forecasts.

Can You Afford to Hire a New Employee? Understanding the True Costs

Salary and Benefit Costs

Even with the best cash flow management, employees can be costly to hire. We’re going to use $60,000 as a base salary for the remainder of this article to take a better look at the true cost of hiring a professional.

When you hire someone, benefits tie into costs, such as:

  • Disability insurance
  • Health insurance
  • Life insurance
  • Etc.

With today’s hyper-competitive workforce, you’re going to need to offer additional perks into the mix to retain talent. For example, you might need to provide tuition reimbursement or offer a hefty sign-on bonus (not included in this total).

There are also other costs, such as holiday bonuses or the cost of coffee in the break room.

In total, you can expect to pay 1.25 to 1.4 times a person’s base salary when all of these figures are added into the mix.

How much will the employee cost now?

Based on the figures above, your employee’s salary plus benefits will come out to $75,000 to $84,000.

Workplace Integration Costs

On top of the salary and benefit costs, you need to integrate the person into the office. If you’re hiring someone remotely, this is an excellent way to cut down on integration costs. Of course, some jobs can’t be done remotely.

The cost for integration can vary drastically but will include:

  • Software
  • Equipment
  • Cell phone
  • Laptop or computer
  • Travel expenses

Any items that are necessary to fulfill the position must be provided to the employee. You might not want to provide a cell phone, laptop, or other things, but they are a necessity in some fields. It’s important for you to understand these integration costs.

For a tech company, it’s not unreasonable for these integration costs to be $1,000 to $3,000+. 

Training Costs

Training is a cost that is now a necessity. You may need to train a new employee immediately, but there are also long-term costs involved. Employee fulfillment and engagement are crucial to retaining employees.

With turnover rates at 57%, you want to do everything in your power to retain employees.

Training is a necessary additional cost that will add $1,286 to the cost of hiring someone full-time. Your training costs may be even higher than this figure, especially if you provide opportunities for education and professional development.

When you add in the cost of training, your $60,000 employee now costs $76,286 to $85,286 – not including integration. 

Lost Productivity Costs

There’s another issue on hand: productivity. You might assume that your new employee will be productive from the start, but statistics show otherwise. ERE Recruiting Intelligence did a great study that found a loss of productivity when hiring a new employee.

The study found that employee productivity for a new hire is:

  • 25% during the first four weeks
  • 50% through week eight
  • 75% through week twelve
  • 100% after week twelve

There’s a three-month period where the employee is learning your systems and integrating into the workplace. Unfortunately, during this period, you won’t be able to leverage their full worth.

You can offset these lost productivity costs by implementing a more intensive onboarding and training process.

Consider Your Hiring Options 

You now understand the costs associated with hiring a new employee, and you may or may not be able to employ a person full-time. In fact, it may not be in your best interest to hire someone full-time.

Internal discussions need to be had to consider hiring:

  • Temp Workers: Short-term needs can be filled by temporary workers. A lot of companies hire temp workers during busy seasons to fulfill their orders.
  • Contract Workers: A contract worker is very similar to a temp worker in that they’re a great short-term option. When you need a temporary commitment from an employee, this is a good option. Contract lengths are often three to nine months long.
  • Part-time Workers: Hiring an employee part-time opens up the ability to grow and increase bandwidth as necessary. Eventually, these positions can be transitioned into full-time options.

These hiring options are a great opportunity to continue to grow your business without a major hit to your cash flow.

Full-time employees are a long-term commitment for your business, and in many cases, flexible hiring options are better for growing businesses. However, be sure to not over-promise a role to any of the employees above.

Hire a New Employee With Confidence

Businesses need to hire their employees with confidence. If you are planning properly and consider the points above, you can continue to grow your business with fewer cash flow risks. A few of the telltale signs that it’s time to hire are:

  • Additional revenue streams can’t be leveraged without hiring
  • Workloads are too challenging to manage
  • Your business needs someone with specialized skills
  • You have to turn customers or projects away

If you’re experiencing any of the issues above, it’s time to consider hiring a new employee, whether it be a full-time or temp position.

Considering All of the Costs

We used an easy example above to see how a person with a $60,000 base salary can easily cost a company $76,000 to $85,000 without considering workplace integration or loss of productivity costs.

When all costs are considered, this employee can easily cost $80,000 to $90,000 or more to hire. You need to sit down, profit plan, and really be able to forecast your finances to better understand whether hiring an employee fits into your business’ budget and overall goals. Hiring can be costly, but it can be well worth the investment. Sometimes a person that may look “too expensive on paper,” may turn out to be well worth the investment for you and your business.