Having too many employees will hurt your cash flow. If you find yourself struggling to make payroll, there could be a lot of things wrong and one of them might be that you have too many people on that payroll.
It is not uncommon for contractors to call me and lament that they aren’t making any money. When I ask how many employees they have, I’ll hear 4, 5 or even 6 employees, plus the owner, and the company is only producing $375,000 in work for the year.
Now, if you divide $375,000 by 8%, which is the minimum amount that the owner should be paying themselves, you get $30,000. That just isn’t a whole lot of money for a family to live on in today’s economy, but that’s all an owner can take if the business is producing $375,000. After paying the owner, you have $345,000 left to pay the 4, 5 or 6 employees. And all material costs. And all subcontractors. And all the overhead expenses. When you add it up, you quickly find there isn’t enough money to go around and your company is in a cash poor position.
That $30,000 for the owner to live on? In reality, for all their time and trouble and sleepless nights they probably aren’t drawing any paycheck, they are paying their employees first.
This isn’t a popular thing to say, it’s especially politically incorrect right now, but folks, you aren’t in business to employ people. You are in business to provide a service and make a profit doing it. The service you provide isn’t about supporting as many employees as possible; your service is the jobs you build. If you are more concerned with having employees than building jobs profitably, your business will go away. And everyone will be unemployed.
We have charts in the book, Markup & Profit; A Contractor’s Guide Revisited on the appropriate volume per employee. Be aware of your numbers, know what’s right for your business and if you are having cash flow problems, check out your volume per employee first.