Hiring maths: when does it actually make sense to recruit?

* Transcript created by AI – may contain errors or omissions from original podcast audio

One of the biggest dilemmas businesses face during a high growth period is knowing when to lean in and to hire, and when hiring is actually gonna make the problem worse. Do you recruit now so you have the capacity to keep growing? Or do you wait until the revenue or sales are already there? How do you know whether you really need another person or whether the business is just busy and inefficient?

So in today’s episode, I’m breaking down the hiring maths. We’ll explore the financial questions you need to ask before recruiting, how to calculate the real return on a new role, and when the right time to actually hire is. Because yes, if you’re really busy, it might be a reason to consider a new hire, but it isn’t always the best business decision to make.

All right. Let’s get started.

Welcome to the Intentional Money Show, where we talk business growth, profitability, mindset, and building a wildly successful creative or digital business without sacrificing your life in the process. I’m Clare Wood, business profit coach, speaker, author, and unapologetic believer that you can build wealth and freedom doing work you genuinely love.

Each week on the podcast, we dive into the strategies and honest conversations that will help you scale sustainably, increase your profit, and build a business that actually feels good to run. Let’s grow your profit.

Something my clients grapple with all the time is when is the right time to hire? When you’re in a high growth period and you’re just putting out fires all the time, you think, “I need to bring on someone new because that will fix the problem.” But bringing on team members comes with its own challenges.

Obviously, at least in the short term, there’s extra capacity of yours in training, managing them, as well as the extra financial responsibility around their salary and on costs. So do you wait till the revenue is already there? How do you know when the right time to bring someone on is?

A question that my clients often ask me, across a range of different areas in the business, is what percentage of revenue should I be spending on my team? And I’ve been asked the same thing about marketing and software and subscriptions, all sorts of things. And my answer is a bit frustrating which I’m aware of, which is that it depends.

And the reason it depends is because every business is different, industries are different, business models are different, and the financial position of each business is different as well. Some business owners are entirely dependent on the profitability of their business to fund their household and lifestyle.

They need to be drawing a consistent amount of money from the business to pay their mortgage and groceries, personal expenses, et cetera. But other business owners might have another source of household income.

They might have another job or a cash buffer or a partner who covers the household expenses and might be in a position where they can go three, six, 12 months without drawing any profit in the business while they invest in their growth. And there’s some businesses that are investor backed. Gosh, look at Facebook.

They deliberately raised capital so that they could hire ahead of the revenue, build the infrastructure and invest for the long term. And what you’ll see with plenty of particularly technology companies, they operate this way. They aren’t expecting each employee to create an immediate positive return in their first month.

Now, it doesn’t mean that the maths doesn’t matter. It just means that their risk tolerance and their cash capacity are different. So with all of this, there’s not a one size fits all percentage that says when a business should hire and when they shouldn’t. So let’s have a look at what’s happening inside your particular business.

The very first question I would ask… I’m gonna assume that for the most part you don’t have a tech investor and that you are wanting to be getting a return on your new employees, in a, a relatively short amount of time. So the first thing I would ask is, what’s your current demand and pipeline look like?

So I do think that a great time to hire is when you are in a genuine growth period and you’re struggling to keep up with increasing demand. Not just perceived demand, like you are actually seeing your sales consistently going up. Maybe you’ve got a wait list, you’re turning away work, and your team is operating, really close or even over sustainable capacity.

And this tells me that the pipeline is healthy. And so then you’ve got proof that sales and demand are likely to continue. And this is very different from someone saying, “I’m gonna hire someone now and hopefully I’ll find enough clients for them later.” Because sometimes I do see people falling into that trap.

They think, “I need to hire a XYZ manager, and once they’re on board, then we can go and fill ’em up.” Now, there are situations where hiring ahead of revenue does make sense, but it is a riskier strategy because you need enough cash to be able to fund the role and understand how long it will take before you start to see a return on that investment.

The flip side of this is that you don’t wanna wait until everyone in your team is completely burnt out, overwhelmed, work quality’s dropping, customers complaining, and people are telling you that they’re gonna quit. Because if you get to that point, you’ve left it too long. I’m married to a recruiter, and I will tell you, recruitment takes time.

People need to give notice, that the process itself takes time, and you’ve got to onboard them, train them. Even an experienced new employee will need to take time to learn your systems and how your business operates. So you don’t wanna hire at the point when, the business is already burning down.

The next thing that you wanna do is calculate the true cost of a role. So I’ve seen some people do this, where they say, “Yeah, salary, 80 grand.” But the truth is, it usually ends up costing you a hell of a lot more than the salary. If you’re based here in Australia, you’ll have superannuation, leave entitlement, worker’s compensation, payroll tax, recruitment costs, equipment, software, training, onboarding costs.

They might need a new computer, a new phone, desks, additional licenses. And of course, there’s also the time that you will need to spend in the actual recruitment process, let alone actually onboarding, training them, managing them, supporting them. Particularly in the initial stages, employees need a lot of love.

They need a lot of time so that they can flourish. You really wanna set your team up for success. So when you are pulling together your business case or having a look at whether it’s the right time or not, you need to make sure that you are including all these costs.

Once you have captured a comprehensive cost base, the next thing you wanna be looking at is the expected return. Now, something that is very important to consider when you are creating this business case is the word incremental. So I used to create business models for large companies, and what we always would do was we had to make sure that we were distinguishing between total revenue and incremental revenue.

So it’s not simply a question of how much money the business will make once the new employee starts, it’s how much extra revenue or cost savings has been created because of this person. So let’s just say that your business is currently generating $200,000 a month. You hire a new employee and three months later, the business is still generating $200,000 a month.

You cannot say that employee generated $200,000 in revenue because that revenue was already there before. You need to identify the additional financial benefit that’s happened. So do they allow the business to take on an extra $30,000 worth of Work each month? Or did they reduce your reliance on an expensive contractor?

So have your costs come down? Maybe they’re not even bringing in any extra work, but they’ve reduced your costs. Maybe they’ve helped the business in another way. Maybe they’ve freed up a senior employee to focus on winning higher value work. So when you’re pulling together your business case, remember you’re always looking at the incremental benefits.

One more thing that I need to highlight here. Incremental revenue is not enough. You need to be looking at the incremental profit that the role creates. Just because this new employee allows you to generate an extra, let’s just say, $20,000 in monthly revenue, it might sound great, but delivering that work might also require contractors, materials, paying commissions, other direct costs.

And so if the additional $20,000 worth of revenue only creates $8,000 of additional gross profit, and the employee costs you $10,000 a month, guess what? The role has not yet reached breakeven. You are actually going backwards. And we haven’t even accounted for tax in there.

But here’s the truth bomb. Sometimes things don’t always go to plan in business. What happens if your sales come in lower than the plan? What happens if the employee quits after a couple of months and you have to start the whole process again? Now, I’m not saying you need to catastrophize every hiring decision, but you do need to understand the risk before you are committing to this new ongoing expense.

Because when someone comes into your business, you have a responsibility to pay them regardless of whether you hit the sales target for that month

So far I’ve just been talking about revenue generating roles, but there’s also support roles. A salesperson or a recruiter has a clear connection to revenue and you can track the additional sales. The return on a support role can be a lot harder to measure. Think a, a bookkeeper or an ops manager, customer service, that’s not directly creating revenue.

But the value might come from freeing up your time or helping the rest of the team to perform more effectively. It doesn’t mean that these roles don’t cr- create a return. It just means you need to think carefully about what outcome you expect the role to produce and how you are going to track it. If you are hiring someone to free up your time, it only produces a return if that actually happens and you actually use that time differently to create more value inside the company.

Otherwise, you’ve just hired someone to make you feel less frantic while the business keeps operating the same way and actually making less profit.

A new hire does not magically remove work from your plate the moment they sign their employment contract. In fact, in the beginning, even a support role will probably create more work because you need to train them, review their work, give feedback. And if you’re already busy and unavailable and you don’t have documented systems, even a great employee will struggle.

And this brings me to one of the worst reasons to hire, and that is because you are smashed, you are so busy, but you haven’t actually figured out why. There’s a principle called the Pareto Principle, which suggests that roughly 80% of our results come from 20% of our input. And I know I’ve spoken about this on the podcast before, but sometimes you can find that a small number of your clients or offers create the majority of your profit.

And you might also find that another small number of clients create the majority of your problems and consume most of your time. After being a, a business mentor for more than 10 years, I’ve seen this again and again.

Being busy does not necessarily mean you’re busy with the right things.

You might have misaligned clients who are consuming a completely disproportionate amount of yours or your team’s time. You might be drowning in admin ’cause your systems haven’t been set up properly. And in these sort of circumstances, hiring another employee may not solve the underlying problem. So before hiring, ask yourself, “Could we solve this capacity problem through better systems, clearer processes, automation, pricing changes, or a reduction in unnecessary work?”

Are there some things you can just stop doing rather than immediately hiring someone to do it?

Hiring is not always the answer to a capacity problem. Sometimes the answer is fixing the business model.

Here’s a simple checklist I would work through before recruiting. Firstly, is there a genuine and repeatable demand for the additional capacity? Or are you just reacting to a temporary spike? Number two, have you confirmed that the problem genuinely requires another person? Have you looked at the systems, the processes, pricing, client mix, and the current team productivity first?

Third, is this role clearly defined? Do you know what this person will own and what success looks like? Fourth, what is the true all-in cost of the role, including recruitment, employee on-cost, software, equipment, training, and of course, management time?

Fifth, what incremental financial benefit will the role create? Will it generate additional gross profit, increase capacity, or free up some of your time so that you can be adding value in other parts of the business? Sixth, how long will it take the employee to become productive or creating additional sales, and what is the expected payback period?

Seventh, does the business have enough cash to fund the role during that ramp-up period, even if things take longer than planned or if they don’t work out at all? Eighth, do you and/or the team have the capacity to actually train and support the new employee properly? And lastly, what will you do if the results don’t happen as expected?

How are you gonna review the effectiveness of the role and decide whether the investment just isn’t working? Now, I know this episode I’ve been talking a lot about all of the things that you need to think about, but I don’t think that you should be terrified of hiring because the right hire at the right time under the right circumstances, it could completely transform a business.

But I just want you to remember that hiring is not automatic growth, and it is a big investment decision and one that I think that you shouldn’t take lightly.

So run the numbers and make the decision that is right for your business and your financial position.

Because just remember, the goal is to build a profitable business that you love that can create financial freedom for you. Thanks so much for tuning in to this episode of The Intentional Money Show. I’ll talk to you again next week.

Thank you so much for tuning in to today’s episode of the Intentional Money Show. If you’re ready for more profit, come find me on Instagram at clare_wood_coach. Thanks so much for tuning into the podcast, and I’ll chat to you again next week

* Transcript created by AI – may contain errors or omissions from original podcast audio