So far we’ve covered when you should hire your first employee, and how you should go about it. Today we’re getting into timing, cashflow and affordability.
The question I wan’t to pose today isn’t just, “Can you afford to hire?” but also “Can you afford not to hire?”
As we’ve discussed in the previous blog posts, hiring an employee adds additional risk to your business, and therefore should be done with the expectation of an additional return (either in the form of lifestyle improvement for you or in the form of dollars).
So how much do you need to have before you hire your first employee? Well, I wish I could provide a straight answer on that one! It’s one of those tricky ‘it depends’ questions. It depends on:
- Where you are now;
- Where you want to go; and
- the financial resources you are willing to invest.
If you’re wanting a firmer answer, get in touch with me. I have created a very specific tool that I use with my clients so you can truly understand the costs involved when hiring an employee. It is very detailed, and requires a holistic view of your current business.
A business owner cannot simply look at their turnover and gross profit margin, allow for an increase from the extra hands and then work out if there will be enough to go around on pay day. There are so many variables that come into play, such as:
- Are you paying weekly, fortnightly or monthly?
- How often will you contribute to their super?
- When is their PAYG withholding tax due?
Some months these payments may all fall together, and on others it may be more spread out. The effect on your cashflow will be noticeable!
As you start with your first employee you need to know what you need to do to ensure there is cash to pay them at the appropriate time and that there is cash to pay everything else, too! When I talk about cash to pay them from an Australian Business point of view I am including:
- The pay that goes to them;
- Their pay that goes to the Australian Taxation Office for each month or quarter;
- Their pay that goes in the form of superannuation every quarter to their super fund;
- The cost of workers compensation; and
- Any commission, bonus or other payments you have agreed to make to them.
You will notice that in the second and third line I have referred to “pay that goes”. This is because this is your employee’s money not yours.
You may have it sitting in the bank due to the difference payment timing but you must ensure that you can afford their complete pay, including the extras! Do not ever make the mistake of assuming it is extra money for you to play with.
So how do you know your going to have the money? It’s back to basics.
If you need $x at (x) time, what number of (x) do you need to sell at your current margin to cover this on an ongoing basis. You also need to take into account your current regular bills, as well as keeping some extra for those months where you might fall short. Don’t overcomplicate the process of thought – do a budget.
When I’m assisting clients to budget for an employee, we do a complete budget for the next three years to see where we are going and can we afford to do what we need to do – and to a greater extent what things do we need to do now to ensure we meet our plans.
When you break it down in this fashion you can monitor it on a daily or weekly basis – if you needed to sell 10 products at a gross profit of 50% each week to ensure the dollars are there then are you doing so?
Working on this basis removes a great deal of stress – you know what you need to do without waiting for weeks to see if it worked.
But remember: budgets are about a number of things – to do them properly it must be a three way forecast looking at your Cash flow, your Profit and Loss, and your Balance Sheet. This is so that you don’t spend money such as PAYG withholding that isn’t your money.
It is crucial to note, that failure to meet payroll obligations (for example; payment of super contributions) can result in costly fines.
Stay tuned for the final part in this series: part four (systems and monitoring) in the coming weeks.
Until then,
David Henderson.
Image may be NSFW.
Clik here to view.David Henderson is one of a rare breed – a qualified and skilled financial services and business consulting professional who has also achieved success as a business owner and entrepreneur. David is a director on the board of a public company and CEO Asia Pacific of ROCG, an international professional services firm which specialises in family and privately owned businesses.
David is the creator of the exciting CashMAX™ suite of business accelerating tools specifically designed for privately owned businesses and based on years of work with thousands of SME companies. He has personally helped many of these owners generate their own business success.
For more information visit www.davidhendersononline.com
The post Guest Post: Hiring your first employee, part 3 appeared first on The Virtual Assistant - Your complete administration solution.