Don't Hire an Additional Employee Until You Check These 3 Things

Even in this tepid recovery, at some point you’re going to have to decide when is the right time to expand your work force? And how can you know how many employees to add without handcuffing yourself to higher-than-necessary overhead? Experts say when it comes to hiring, it’s a mixture of planning, projecting and, in some cases, more of an art than a science.

1. Consider Your Capacity

The first thing to consider when it comes to hiring is figuring out how much ongoing work you will have to keep a new employee busy, says Andrew J. Sherman, a partner in the Washington, D.C., office of Jones Day who has advised many small business clients on growing their companies.

“My rule of thumb is if the employee can be at 60 to 80 percent capacity, then that is a worthwhile hire,” Sherman says. “If someone would be below 60 percent capacity, in these uncertain times it’s probably not worth making the investment. Maybe in a [thriving] economy you’d hire people at 40 percent capacity.”

If you don’t have enough work for a permanent employee but still need help right away, a temporary worker or contractor may be a better solution until demand for your products or services picks up, he says. (Once that happens, you can offer the full-time job to that temporary worker who already understands the job.)

2. Evaluate the Competitive Landscape

Even in today’s job market, there are certain industries where you may have to snap up great people as soon as you find them, or you’ll lose them to your rivals. (Or worse, settle for someone sub-par.) Manufacturing, for instance, is experiencing a vast shortage of skilled workers right now. If you run a plant in a rural area and find a reliable, technically trained worker, you may have to act quickly—regardless of whether you have enough work to keep them busy in the short term.

“If you’re in a rapidly moving industry, you have to do a competitive analysis and ask: ‘Do I have to hire at this point, irrespective of demand, so I can stay competitive?’” Sherman says. Of course, you need to have the necessary capital to pull that off, he adds. “You’ll need to have a bigger rainy-day fund in place if you’re going to start hiring people without knowing if you have that demand or capacity.”

3. Determine Your Profit Goals

It’s also important to ensure the cost of hiring workers doesn’t eat into your profits, notes Greg Crabtree, a partner in the CPA firm Crabtree, Rowe & Berger in Huntsville, Ala.

“It’s about getting the right person at the right pay, at the right level of productivity,” says Crabtree, who also authored the book, Simple Numbers, Straight Talk, Big Profits!, which encourages using financial benchmarks to make business decisions. His firm, which specializes in helping businesses improve profitability, has analyzed the finances of hundreds of small businesses. “I can count on one hand the number of times it was something other than [lack of] productivity that was keeping [a small business] from being profitable,” he says.

Crabtree recommends that businesses in all sectors look at measures such as gross-profit-per-labor-dollar spent. In other words, if you’re hiring lower-wage workers—generally those whose pay ranges up to $15 an hour—it usually only makes sense to hire if you’ll be able to bring in three-and-a-half to four times the person’s annual salary in revenue to offset it, says Crabtree. For higher-wage workers, such as those a professional services firm might hire, make sure you can generate at least two times someone’s salary in sales. “Every business’ conditions are unique, though,” he adds.


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