When a small business employs another person, it can be a very big decision. If you are fan of statistics, you can make it sound very impressive. I grew my company by 25% last quarter. Really what did you do, oh I employed my fourth team member!
When a large business employs another person, the decision can be far less significant, for example if they already have 100 employees and then employ one more person the impact on the increase in wages is minimal.
Recruiting the right person in any business is crucial, however in a small business this decision can have a huge impact on the bottom line almost immediately.
A great way to get meaningful information is to use a ratio known as “Wages to Revenue”. In other words, you divide the amount you are paying out in wages by your total income. If wages to revenue is trending up this could be a good indication that you are overstaffed or you may be understaffed and are paying out lots of extra money in overtime! If it is trending down this could be a great sign, however you also need to be aware that your staff aren’t being over worked, and are becoming fatigued or that service levels and quality have dropped.
Clients often ask me what is considered a good wage to revenue ratio? There are many industry benchmarks that you can refer to. However, benchmarking data is made up of both great businesses and bad businesses. It’s a bit like asking what is the average price of a house in a neighbourhood. It could include the multimillion dollar mansions right down to a dilapidated old house. Benchmarking data is just a starting point.
A couple of years ago I was working with four businesses all part of the same franchise. Even their figures differed quite significantly and it was just based on the way each owner chose to run their business. An acceptable range differs from business to business, so it’s on your average.
Once you have established an average and you can see which way the numbers are trending you can then consider the following three points:
- Is this just a short-term occurrence in an increase in workload or a particular project? If it is you might be better off not employing that extra person.
- Is this a seasonal fluctuation and can you see some quieter periods coming up? If this is the case, you may be able to reach an arrangement with your team where you can offer time off in lieu. Just check you are staying on the right side of the law when doing this.
- Is this a long-term trend and if so how can we increase current productivity? Look at how your work space has been set up. Think about where there may be double handling and inefficiencies and how you can better streamline processes and procedures. You may also consider whether it would be better long term investing in new equipment and technology to make things more efficient.
If the answer is “no” to the questions above then you want to ask yourself:
- Will my “Wages to Revenue” at least remain the same or possibly decrease by employing an extra person? In other words, will this person help you make more money compared to the extra money you are paying out in wages.
- How long will it take? When employing a new person, it takes time to train them and for them to become a productive team member. By being realistic about what this time frame is you can work out how much it really is going to cost and whether it’s worth it.
When you can analyse some of the key numbers by looking at how they are trending you will be able to make better decisions. Get started today and either on a weekly or monthly basis start to track your “Wages to Revenue” and the next time you feel the need to employ someone you will be able to make an informed decision.
Bigger is not always better and you want to make sure that by employing an extra person it makes good financial sense.
Until next time,
Sam ‘get tracking’ Harrop