Not All Employees Are Created Equal By Jason Arsenault Congratulations! You now own your own business and are making a profit (hopefully). As your business grows, one of the most important pieces of continued success is the hiring of people. It also becomes very important to measure whether you hired the right person for your business. This can be tricky, especially in a business that is dynamic. For example, in a car dealership it can be easy to calculate whether that new salesperson is adding to the bottom line. You are simply going to be able to see how many sales he/she has each month. Other positions it might not be so easy to calculate the employee’s contribution. Let’s say that instead of a new car salesman you needed to hire someone in billing. Not only is this person going to need training on how the billing process operates, they have also been put into a customer relationship position. It is critical to the success of locally owned businesses to have people that meet with the customers of that business with the attitude of taking care of the customer. Bad experiences drive customers away from businesses to new ones. I think all of us can think of a situation where we were so turned off by an experience with a business that we promised ourselves never to return. As business owners we have a baseline that we can start with when hiring a new employee. If you keep financial statements or sales records, we can determine where you are financially before the hiring. Going forward we can use some simple calculations to see if that employee is making the contribution we had hoped for. One of the easiest formulas would be a Profit for Headcount. Remember that different months 32
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generate different income flows. For example a tourist business is going to generate more income during tourist season than during offseason. Just make sure you are comparing apples to apples. The formula is going to take your net income for that month and divide it by the number of people responsible for that income. For example, before the new hire you had five employees and net income of $5000 for the month, $1000 per employee. After the new hire, you now have $6000 of net income for the month, $1000 per employee—same result. Maybe we can conclude it was a successful new hire. Employees can be your most significant cost as a business. So, you want to make sure it makes sense to move forward with a new hiring. Use a Salary Run Rate that simply takes your recurring wage expense and annualizes it. This is a way to see how much you are going to spend in salaries, and then you can determine whether this makes sense for your business to hire another employee. For many business owners, it is a great satisfaction to be able to create jobs for the local economy, however it doesn’t make sense if your business can’t generate enough income to pay for them. There are a handful of easy ways to calculate the financial health of your business that don’t involve having to understand what the financial statements are telling you. Sit down with your CPA to learn these simple methods.
