Like Breathing, Being Profitable Isn’t an Option

Published on November 8, 2014

1411stonestewYou know those safety announcements the flight attendants give? The ones where they tell you that if the oxygen masks drop, you should put on your own mask before helping someone else? Well, I just got back from a visit with family in Texas, and hearing that announcement once again made me think about business. The announcement used to bother me; it sounded so selfish. The idea that you’d let your child go without oxygen while you took care of your own oxygen needs sounds wrong. But they’re right. When you’re able to breathe, you can help others who can’t help themselves. But if your child has oxygen and you don’t, he or she won’t know what to do—and then you’ll both be in trouble.

Likewise, if you don’t do what’s necessary to keep your business strong and profitable, your business won’t be strong enough to take care of those who depend on it.

Can You Afford a New Employee?

One mistake many businesses make is having more employees than they can afford. The employees begin to drain the financial resources of the company, and pretty soon the business goes under. Regardless of the time of year, when business picks up, you will want to consider hiring new employees. I hope you approach the responsibility carefully. Before you hire anyone, whether office or field staff, there are steps you should take to be sure your company can stay strong.

Are You in Good Shape?

First things first: Be sure your business is on solid ground before you even think about hiring anyone new. Do your math; make sure you’re making a profit on every job and that you don’t have any existing dead wood on staff. If your existing employees aren’t getting things done now because of poor systems or poor leadership, hiring someone new isn’t going to help. This is also the time to be sure you’re being honest with your evaluation of your company and your processes.

Do the Math

What will this new employee cost? And how much additional business will you need to sell, build and collect to cover his wage or salary? You can’t hire someone new and then find out you don’t have enough work for him. If you hire and then fire without good cause, word will get around and you’ll have a hard time finding anyone who is any good to come and work for you.

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Let’s consider a new carpenter. Hiring him will be an increase to your job costs. So one method of finding out how much additional business you’ll need is to divide the cost of the new employee by your job cost percentage.

Example: You want to hire a new carpenter and you plan to pay him $25 an hour. You know that your labor burden is about 30 percent of wages. (Labor burden is the additional employee cost, like federal payroll taxes, unemployment, insurance and whatever other costs your company incurs.) Your gross margin is running 33 percent, so job costs are 67 percent of your sales price.

$25/hour x 40 hours/week x 48 weeks a year is $48,000. Multiply that by 1.30 to cover the cost of your burden: $48,000 x 1.30 = $62,400.

Now we divide the cost of the new employee by the job cost percent. $62,400 x .67 = $93,134. That means that before you hire this carpenter, you need to be sure that you are going to sell at least $93,134 more business during the next year to pay for this new person. (This is similar to how you handle an unbudgeted overhead expense, outlined in Chapter 5 of the book, “Markup & Profit Revisited.” See this book at www.

Growing your business is a great plan, but take careful steps. Don’t take on new employees unless you know you can afford them.

Japanese Koi Kodama

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