Can We Afford to Hire Someone? How to Decide From the Numbers
Can we afford to hire someone? Yes, when two things are true: the contribution margin on the work the new person will produce is greater than their fully loaded cost, and your cash forecast can carry their wages for the six or so weeks between their first paycheck and the first dollar their work brings in. The first is a margin test. The second is a cash test. Most owners run neither and decide from how tired they are.
We run an accounting firm and this is the most common question we get in the fourth quarter, usually phrased as “I’m drowning, can I hire?” The answer is in the closed books, and it takes about an hour to find.
What does an employee actually cost a small business?
Not the wage. The wage is the starting point. A fully loaded cost adds everything that exists because the person exists:
- Employer payroll taxes. Social Security and Medicare at 7.65%, federal and state unemployment, and workers’ compensation, which in a trade can be a significant percentage on its own.
- Benefits. Health insurance contribution, retirement match, paid time off. Paid time off is a real cost: you’re paying for weeks that produce nothing.
- Equipment and tools. The truck or the vehicle allowance, the phone, the laptop, the software seat, the uniform, the tools that walk off with them.
- Onboarding. The first few weeks where they’re slower than the person training them, and that person is slower too.
For most small businesses the loaded cost lands 25% to 40% above the wage, higher in trades with vehicles and workers’ comp. A $60,000 hire is a $75,000 to $84,000 decision. Write that number down before you do anything else.
The margin test
The question isn’t whether revenue will go up. It’s whether the contribution from the new person’s work covers their loaded cost. Contribution margin is revenue minus the direct costs of delivering it: materials, subcontractors, and the labor doing the work. It’s what’s left over to pay overhead and profit.
Here’s how it goes, with round numbers for the sake of the arithmetic.
Say the hire will let you take on an additional $200,000 of work a year in a service line that runs at 45% contribution margin before their labor. That work contributes $90,000. Their loaded cost is $80,000. The hire nets $10,000 to the business, plus it gets you out of the field, which has its own value. Tight, but it works, and it gets better as they get faster.
Now say the service line runs at 30% contribution margin before their labor. The same $200,000 of work contributes $60,000. Loaded cost is still $80,000. The hire loses $20,000 a year, and the more work they do, the more it loses. Revenue is up, profit is down, and you’re working just as hard managing them.
Same hire, same wage, same revenue. The margin on the work decides whether it’s a good idea, and you can’t see that margin unless your books tag labor and revenue to the service line.
Should I raise prices before hiring?
When the margin test says no, the answer is almost always to fix the price first, then hire.
In the 30% example, the problem isn’t the hire. It’s that the service is priced so that any labor beyond the owner’s free labor loses money. The business has been “profitable” only because the owner works for whatever’s left. Adding an employee at a market wage exposes that. So the sequence is: raise the price on that line enough to bring contribution to a level where the hire pays for itself, communicate it in December for January 1, watch what happens to volume, and hire in the first quarter on the new numbers.
This is also why the hire feels impossible even when you’re turning away work. Turning away work at a losing price isn’t a capacity problem. Hiring into it makes the loss bigger.
The cash test
The margin test says whether the hire is a good idea over a year. The cash test says whether you survive the first two months.
A new employee is paid from week one. Their work is invoiced when it’s done and collected on your terms, which for most service businesses means the first real deposit from their work arrives around week six. Between those points, you’re funding their wages, their payroll taxes, and probably their materials from cash on hand.
Put the hire on the 13-week cash forecast as a real line: wages and taxes out every pay period starting on the start date, revenue in starting six weeks later. If any week in between goes negative, you don’t have a hiring problem; you have a timing problem. The fixes are a delayed start date, a line of credit sized to the gap, or invoicing deposits on their work up front. What you don’t do is hire and hope, because payroll is the one bill that can’t be late.
What a CFO does with this number
A fractional CFO runs both tests every quarter, whether or not anyone is asking about a hire, because the answer changes as the numbers change.
- From the closed books, they track contribution margin by service line and know which lines can carry a hire and which can’t.
- From the forecast, they know how many weeks of a new wage the cash can absorb and in which month the gap is smallest.
- From both, they time it. Sometimes the answer is “yes, in February, after the price change and after the January estimate clears.” Sometimes it’s “hire a part-timer now on the 45% line and don’t touch the 30% line until it’s repriced.”
The difference between that and “I’m drowning, can I hire?” is the difference between a plan and a gamble with someone else’s mortgage.
Where we come in
Our advisory tier answers this question every quarter. The monthly close tags labor and revenue to service lines so the margin test is a report, not a project, and the 13-week forecast is updated weekly so the cash test takes ten minutes. When a client is thinking about a hire, we run both, put the answer in dollars, and tell them which month. If you’re heading into the fourth quarter wondering whether you can afford the next person, reach out. We’ll run the two tests on your numbers and tell you.
Frequently asked questions
How do I know if I can afford a hire?
Compare the contribution margin on the work they’ll produce to their fully loaded cost, then check the cash forecast can carry wages until they bill.
What does an employee really cost?
Wages plus payroll taxes, benefits, equipment, and vehicle, usually 25% to 40% above the wage.
Should I raise prices first?
If the margin on that service is too thin for the hire to pay for itself, yes, price first, then hire.
