Business Structures

8 ways to know if you can afford to hire your next employee - Part 2 of 2

8 ways to know if you can afford to hire your next employee - Part 2 of 2

8 ways to know if you can afford to hire your next employee - Part 2 of 2

The opportunities for growth in your business will come in ebbs and flows, like waves. Hire too early and you’re a sitting duck waiting for an opportunity off in the distant horizon. Hire too late and you’re playing catch up trying to keep your newest clients happy. Hire at the sweet spot where opportunity meets capacity and with seemingly little effort, a couple of little paddles allows you to ride the wave. So to help you hit the sweet spot, we welcome you to Part 2 of the Can I afford my next Employee series.

Crunch these 3 numbers before you sign that Employment Contract!

Number Cruncher 1

[Cashflow] Can your Business Cashflow afford 3 consecutive months of NIL productivity?  

Ultimately you want to make a return on any investment you make, and an employee is one such investment.

Think of Apple who is reported to make $1,865,306 revenue per employee per year!

You will in time make a return but we’ve found it take a good 3 months to be able to assimilate the new team member into your systems and processes.

Budgeting for worst case scenario then, before signing an employment agreement could the business afford 3 months of NIL productivity?

An even better question to ask yourself is do you have [Annual Salary / 4] set aside in a Cash Reserve?

For example -

Proposed annual salary of $100,000 for a Sales Manager, divided by 4 equals $25,000 in reserve to account for little to no productivity in the first 3 months.  

If you chose well in hiring process and she turns out to be a winner, then congratulations!  Treat it as a bonus.

Number Cruncher 2

[Growth] Does Your Business Growth forecast for the next 12 months exceed 2 x their Annual Salary?

Let’s start with an example.

Say your current turnover is $1M and you have a documented budget and plan for 10% growth this year.

That means your turnover should be $1.1M in 12 months time or growth of $100,000.

But your prospective employee is going to cost you $100,000 too.  So you’re on track to grow the business in line with your expenses.

Which mean you’ll be bigger, but there’s no more profit in your pocket for all the additional stress and effort.

Sounds silly but this is the very reason why many business owners tell us that they are now making more money than they ever have, but still experience the samestart up challenges of lumpy cashflow and low profitability.

This is why you need to have a documented budget and plan that exceeds at least 2 x the annual salary in year one.

Using the above example, the growth would need to be 20% or $200,000 to satisfy the 2 x Annual Salary test.

Errmmm… I know I need a budget but I don’t have one.  What exactly is a budget and how important is it?

Imagine Entrepreneurship to be like a long voyage on a boat (in fact it does sound a little like Entrepreneur-SHIP!).  You the business owner are the explorer, charting waters you’ve never been before.  

As an explorer, your 12-month forward-looking budget is your telescope.  Every time you stand on deck and look through your telescope, you can see the forward-looking direction, the condition of the ocean and the point you’re aiming for on the horizon.

This lets you know what’s coming up and how you can best prepare your ship and crew for the seas ahead.

Number Cruncher 3

[Sales] Do you confidently have at least 1 / 4 of the Annual Salary in your Sales Pipeline?

I recently conducted a Look Under the Hood for a consulting business who was considering coming on board with Inspire.

He asked our opinion as to whether his numbers indicate that he could afford his next employee - with an annual salary of $60,000 + SUPER.

When we crunched the numbers on his sales pipeline and he had $180,000 in Sales about to close.  

This was both good and bad.

Good because all the focus on Sales over the last 6 months worked!

Bad because the sales had already started to close, and he was forced to roll up his sleeves and get on the tools because he hadn’t hired ahead of the growth.

Which means sales would have stopped while he worked IN the business, delivering on his promises.

So here’s how to run the numbers on your Sales Pipeline (you do have a pipeline don’t you??  If not do it now with the following template)

A Sales Pipeline needs to answer the following Questions -

  • Who - Who is the prospect?
  • What - What is the service / product that would help them and what is it’s value?
  • Where - Where did we meet them?
  • When - When did they enquire of this service / product and when do we expect this deal to close?
  • Why - Why do they need this product / service?  
  • How - How far along the buying journey are they?

You need to know the typical stages a customer / client goes through along the buying journey and for each stage how likely is it that they will ‘close’.

For example - An IT company who helps small businesses implement cloud technology.

  • Enquiry (20%)
  • Product Demo (30%)
  • Proposal (40%)
  • Custom Implementation Plan (70%)
  • Verbal Agreement (90%)
  • Signed Contract (100%)

FAQ:  What is a sales pipeline?

It’s a central spreadsheet where you track any opportunities for Services / Products you sell. This document is a MUST USE for any Business that relies on SALES to make a living. You can download this Inspire Template and build your Sales Pipeline today.

FAQ:  What is a weighted average pipeline?

It the total value of what you have in your sales pipeline multiplied by how likely it is that the sale will be accepted.

For Example -

Business 1 has made an enquiry for your $1,000 Cloud Transition service.  Historically 20% of opportunities at this stage have proceeded through to a signed contract.  So for now, instead of counting on $1,000 in pipeline value, we plan on $200 ($1,000 x 20% or Value x Likelihood).

Where do I get my conversion rates from?

You have to start measuring them, starting now! The more reliable your conversion rate percentages, the more reliably you can make decisions about how much of the money in your pipeline will typically convert into as cold hard cash in your bank!

 

Let’s bring it all together

Remember the story about Mick Fanning surfing the waves at Snapper Rocks?

It’s about timing.  Not too early, not too late.

Crunching the 3 numbers in this guide (Cashflow, Growth and Sales) are tests to make sure you’re covered in the Now, the Short Term and the Long Term.

Those 3 tests again -

The NOW

[Cashflow] Can your Business Cashflow afford 3 consecutive months of NIL productivity?

The Short Term

[Sales] Do you have at least 1 / 4 of Annual Salary in Sales that are ‘ready to drop’.

The Long Term

[Growth] Does Your Business Growth forecast for the next 12 months exceed 2 x their Annual Salary?

The opportunities for growth in your business will come in ebbs and flows, like waves.

Applies these principles and you’ll be riding the waves of opportunity like Mick Fanning.

Let’s just hope a big great white shark doesn’t get ya!