Scale Up Your Staff In a Financially Efficient Way

For any business owner, Founder or CEO of a growing business, a common dilemma is when and how to take on permanent members of staff in a way that won’t be to the detriment of a business.

Costs associated with permanent members of staff

Once a new member is staff is recruited there are a number of costs which your company will incur:

• Recruitment costs
• On boarding costs
• Salary
• National Insurance, Bonus and Pension

For example, let’s look at the costs associated with hiring a developer on a salary of £50k per annum:

• £15k recruitment fees
• Legal and administrative costs for contracts, training, payroll set up etc. This will usually be a time commitment rather than an outright cost
• Salary of £50k
• 10% bonus of £5k (not mandatory but required for employee retention and satisfaction)
• Employers National Insurance of £7.5k
• Pension costs can vary, however if a company contribution of 3% is made then this would be £1.7k

So, for a £50k hire this would actually cost the employer just under £80k in the first year.

This is just the financial aspect of hiring permanent staff. In addition to this, a significant time and effort is required to train, motivate and lead staff.

On the upside, if you can get all of this right you have a member of staff that is shaped into the employee that your business needs and can create value for your business for years to come.

The message here is that recruiting permanent staff is costly. Only do so when absolutely necessary.

What are the alternatives?

Two alternatives are to either go out to the contract market or outsource to a 3rd party.

For £80k per annum you could pay a contractor £400/day.

A 3rd party may be able to offer your business something similar.

Both options above will provide you with a highly skilled professional who is an expert in their field, as opposed to someone who needs developing.

Depending on the contractual terms you should be able to end the contract if required, which allows you a degree of flexibility to scale up or down your costs as required.

When should I hire?

As a general rule of thumb, I always advise my clients to only recruit permanently when they can demonstrate one or more of the following:

• Sufficient funding available (through investors or borrowing) to cover two years worth of costs
• That the employee will deliver a benefit to the business that is either equivalent to the monetary value of their costs or some other non monetary benefit
• That the business has enough surplus cash available to them through their existing operations

Investing in staff should be treated as any other decision – a full investment appraisal should be performed. Let’s work through a quick example. Let’s say that we owned an IT consultancy and wanted to recruit a new consultant at £100k per annum.

Their costs will be roughly £125k once all other staff costs are added on.

Let’s assume that the consultancy business is running at a gross margin of 80% before people costs. Therefore, to justify the salary, revenues of £156k would need to be generated just to break even and we don’t want to break even as that is just doing more work for no more money. We want to exceed that!

Conclusion

Think carefully before hiring, and consider alternative strategies. One that I always recommend is to use contractors or 3rd parties during growth, and once that level of activity is the norm, only then recruit permanently.

Ensure that you conduct a full investment appraisal before making a financial commitment such as this.

Thank you for reading. If you have any questions regarding how to manage the finances for your business, please drop me an email on info@mcquade-consulting.co.uk