This article first appeared on Inc-South East Asia. Visit their page for more business and leadership resources.
One of the hardest questions facing fledging businesses is when to grow their workforce. Knowing when to add your next employee—or when not to—can have tremendous impact on your bottom line.
One indicator you can use to see if you are financially ready to add a new employee is to take a hard look at your ratio of income to wages. Simply divide the total amount of income by the amount you are paying in employee wages. If this ratio high or trending upwards, you may be overstaffed. However, it may also be a sign that you are understaffed and are paying out a large amount of overtime. If is trending downward, now may be a good time to add a new employee.
An equally importantly indicator is whether you have enough work to justify a new employee. For instance, if you are paying out a large amount of your salary budget in overtime, now would be a good time to add an additional employee.
One caveat, however, is to first determine if your current overtime situation can be expected to continue. You may find that it is being caused by such things as a temporary surge in sales and customer demand, or is simply seasonal or cyclical demand that will quickly subside.
If the work is available to justify a new employee, the next question you need to ask yourself is what impact will adding an additional employee have on your wages-to-income ratio. This can be a tricky equation – you need to look at how much the additional employee will cost versus the financial gain of having an additional employee to perform the job, which will free up money you have been spending on overtime.
Also, when adding an employee, make sure you include all the costs of the employee. Health insurance, dental insurance, and other benefits quickly add up and can have a significant impact on your bottom line.
It is also very important that you realize that you may see very little return on your investment in a new employee for weeks or even months. Depending on the complexity of the job, your new employee may require extensive training before performing up their full potential.
This article was written by Rhett Power, a best-selling author, Rhett Power is the author of the new book The Entrepreneur’s Book of Actions: Essential Daily Exercises and Habits for Becoming Wealthier, Smarter, and More Successful. Learn more at rhettpower.com. @rhettpower