Labor Burden Information Tip #5:
Make Better Hiring Decisions by Thoroughly Understanding Potential Additional Costs
Bad hiring decisions can have a devastating effect on your bottom line, so you want as much objective data at your fingertips as possible before you hire. You can use labor burden calculation information as a starting point when it’s time to:
- Determine IF you should bring in new staff.
- Compute the total cost of different potential employees.
- Establish sales targets and earnings goals for current or potential members of your team.
Should we increase our direct labor to handle spikes in demand? Hire that Sales Manager? Add another Supervisor?
Here’s a step-by-step process to help you step through the “numbers” part of the decision-making process:
- How Much Help Do You Really Need?
Is this truly a full-time position? Or could you get by, at least initially, with a part-time position?
- What’s the Potential Cost?
Determine all of the costs, in addition to annual compensation cost, that you will add to the company for this potential employee. You’ll want to use your labor burden calculator to help you remember the wide variety of additional costs that you may need to incur for a new employee.
NOTE: Don’t forget to include the front-end orientation and training costs involved in bringing a new employee up-to-speed.
- Have you looked in-house?
Perhaps you can avoid hiring a new person altogether. After you determine the hourly cost for this new potential employee, look at what your existing employees currently do. Some ideas to consider:
- You may be able to retain current, deserving existing employees by allowing them to step up to an “enriched” or more interesting job.
- See if you might be able to shift current responsibilities in a way that would let them modify their job to take on these responsibilities.
- Check their fully-burdened cost of overtime. If their overtime cost is acceptable, would they be willing to work a reasonable amount of overtime to meet your needs.
- Another alternative would be to push part of their current tasks over (or down?) to other lower hourly-rate employees.
Given the costs that you’ve computed (both hourly and annual), might it make sense to consider outsourcing this work? There can be a variety of benefits to be gained by outsourcing…
- Set Related Income Goals, if Applicable
After you’ve really researched your costs, and assuming that you’ve decided to move forward with the hiring process, you’ll need to know your “income production” goals for each potential new employee.
- For direct labor employees, determine the dollar amount of work they need to perform – at your established gross profit target rates – to meet your gross profit goals.
- For potential sales people, you’ll need to know how much they need to sell to “break even” (to cover what they’re costing), and how much more they will need to sell to add the desired gross profit increase to your bottom line.
- Match the total costs against the anticipated benefit of bringing each employee on board.
How to figure out THOSE amounts? Stay tuned for the next Tip in this series, and I’ll show you some example calculations.
- Other Numbers?
Although it’s beyond the scope of this article, you should also research and consider using one (or more) of the many available skills tests and personality measurement systems that are currently available.
Those tools and scores can prove to be invaluable as you search for, interview, consider, and sort through your list of job candidates.
Of course, not all hiring decisions can be totally quantified or cost-justified. There are MANY other factors to consider. However, as you embark down the rocky road of acquiring new or different employees, having your walking stick of objective information in hand may very well help you avoid some of the bigger pitfalls in the road!
Yes, it may take a bit of discipline to run the calculations and step through the thought process, but I’d like to close with a quote from Jim Rohn (entrepreneur, author, and motivational speaker) who said:
“We must all suffer from one of two pains: the pain of discipline or the pain of regret. The difference is discipline weighs ounces – while regret weighs tons.”
- Click here to access a free (single employee) Cost & Pricing Analyzer™ (eCPA).
- Have you had a chance to run some of your own numbers? If so, what’s the FIRST way you’ll use your information? To share your insights, please email me from our Contact Info Plus Accounting page …
This is one of a series of useful tips that show how you can add to your bottom line when you know each employee’s true hourly cost!
Disclaimer: All numbers presented herein are theoretical and should not be construed as industry averages. You will need to use your own eCPA to see your own company’s true, fully burdened costs.