You know those safety announcements the flight attendants give, where they tell you that if the oxygen masks drop, put on your own mask before helping someone else? We just got back from a visit with family in Texas, and hearing that announcement once again made me think about business.

The announcement used to bother me, it sounded so selfish. The idea that you’d let your child go without oxygen while you take care of your own oxygen needs sounds wrong. But they’re right. When you’re able to breathe, you can help others who can’t help themselves. But if your child has oxygen and you don’t, they won’t know what to do and you’ll be in trouble.

Likewise, if you don’t do what’s necessary to keep your business strong and profitable, your business won’t be strong enough to take care of those who depend on it.

One mistake many businesses make is having more employees than they can afford. The employees begin to drain the financial resources of the company, and pretty soon the business goes under. It’s spring, and some of you will want to consider hiring new employees. I hope you approach the responsibility carefully. Before you hire anyone, whether office or field staff, there are steps you should take to be sure your company can stay strong.

First things first: be sure your business on solid ground before you even think about hiring anyone new. Do your math, make sure you’re making a profit on every job and that you don’t have any existing deadwood on staff. If your existing employees aren’t getting things done now because of poor systems or poor leadership, hiring someone new isn’t going to help. This is also the time to be sure you’re being honest with your evaluation of your company and your processes.

What will this new employee cost? And how much additional business will you need to sell, build and collect to cover their wage or salary? You can’t hire someone new and then find out you don’t have enough work for them. If you hire and then fire without good cause, word will get around and you’ll have a hard time finding anyone who is any good to come and work for you.

Let’s consider a new carpenter. Hiring them will be an increase to your job costs. So one method of finding out how much additional business you’ll need is to divide the cost of the new employee by your gross margin.

Example: You want to hire a new carpenter and you plan to pay them $25 an hour. You know that your labor burden is about 30% of wages (labor burden is the additional employee cost, like federal payroll taxes, unemployment, insurance and whatever other costs your company incurs). Your gross margin is running 33%.

$25/hour × 40 hours/week × 48 weeks a year is $48,000 and that times 1.30 to cover the cost of your burden: $48,000 × 1.30 = $62,400.

Now we divide the cost of the new employee by the gross margin of 33%. $62,400 ÷ .33 = $189,091. That means before you hire this carpenter, you need to be sure that you are going to sell at least $189,091 more business during the next year to pay for this new person. (This is similar to how you handle an unbudgeted overhead expense, outlined in Chapter 5 of the book, “Markup & Profit Revisited“.)

Growing your business is a great plan, but take careful steps. Don’t take on new employees unless you know you can afford them.

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Abe Degnan
Abe Degnan
April 24, 2013 9:07 pm

Thanks for making the correction in the math!

RA
RA
April 12, 2013 8:27 am

Wow, this article open my eyes and sobered me up! I ran the numbers on excel and you have no idea how this really made me realize how much more we under estimate hiring others, let alone ourselves. I started my business working on foreclosures during the housing crises. We did quite a bit of business since 2008 and we never really had to market thebusiness that much. However, now I find myself looking to market more,revamp our website and find new creative ways of doing business. I’m so happy to keep reading your articles, I have to say this… Read more »

Lou Francavillo
Lou Francavillo
April 11, 2013 6:18 pm

Michael, as you know, we spoke about this years ago and I must say that listening to you and reducing my employees probably saved my company. Unfortunately here in NY we have a situation that is causing much grief to general contractors like myself who want to keep payroll to a minimum. Currently I have 2 employees, my wife who is part time bookeeper and my son who is project manager and doessome finish carpentry. The rest of my labor force is sub-contracted. Herein lies the problem. I have just been notified that I am being cancelled (again) by my… Read more »

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