Can I afford to hire an employee?

Monday, March 9th, 2009

Dear Norm,
I have a small business that tutors people in writing. I’ve been running it out of my home as a sole proprietor, using independent contractors. One woman who has been editing for me wants to come on as a full-time employee doing marketing and sales. I need someone to do that. Still, taking her on full-time would be a big financial commitment. She might also generate more business than I could handle. So am I crazy to consider hiring her?

Dear Sharon,
It’s never crazy to hire an employee, provided you have the need and understand the financial consequences. That involves determining the additional sales you’ll have to generate in order to cover the new expenses. To do that, add up those expenses over a period of time and divide by your average gross margin. Suppose, for example, that in the first year it will cost you $39,000 to bring on this employee and make other changes, and your gross margin is 30%. You would then need to increase your annual sales by $130,000 at the same gross margin to cover the new expenses and maintain your current profitability. To reduce the risk, try an experiment. Have her work part-time in sales and continue doing her editing until you both have a better sense of the new arrangement.
Yours truly, Norm

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