Can I afford my first employee?

When you start looking for staff for the first time, you want to know whether hiring staff is a responsible choice. You can never quite know for sure, but taking a close look at your financial situation can offer peace of mind. Rien van Beuzekom, Director of Accounting at accounting and consulting firm Mazars, explains how to calculate whether hiring an employee will increase your profit.

Hiring your first employee comes with responsibilities (in Dutch). It is not a decision that should be taken lightly, Van Beuzekom explains. “To get off to a confident start, I would recommend crunching the numbers and identifying key factors first: the costs, the benefits, and your current situation.”

Map out the basics

“Essentially, as with other investments, it comes down to costs and benefits”, Van Beuzekom explains. When asked how you should go about deciding whether you can afford to hire an employee, he answers without batting an eyelid: “Calculating whether you can hire staff is more complicated than working out whether you can buy a piece of equipment and there are lots of unpredictable factors at stake. Avoid overcomplicating things and focus on the three basics: costs, the possible returns, and your current financial situation.

Van Beuzekom acknowledges that many businesses have cold feet at first, but usually hire a second and third employee relatively quickly

1. Employee costs

Personnel costs consist of more than gross wages. “Admittedly, wages are the lion’s share. If there is a Collective Labour Agreement, a CAO, for your industry, it will usually lay down clear wage guidelines. If your industry does not have a CAO, you will have more freedom to draw up your own employment conditions and set a suitable wage yourself. You will have to follow certain laws and rules, like the minimum wage act and the working conditions act.”

“Once you work out gross wages, you can figure out all the other costs with an online tool (in Dutch). This will paint a clear picture of primary staffing costs such as holiday pay and employee insurance. Remember to add the costs of secondary employment conditions too, if you decide to offer any. Finally, you can check whether you are eligible for payroll benefits and subsidies in order to reduce costs.”

2. Employee benefits

How much you can expect to earn by hiring an employee usually depends on their role and type of employment. Van Beuzekom explains: “If you hire an extra painter to work 20 extra hours, your turnover will increase with every hour they work. Bringing in a support role like an office manager, on the other hand, makes matters more complicated. Your turnover may not increase with every hour they work, but it may still increase because you can take on more work because of the time you save. On top of that, support staff often have non-financial benefits too. For example, you might have to take on fewer tasks that you do not enjoy.”

3. Current turnover and earnings

“To put your new financial situation as an employer into perspective, you will need something to compare it to. Take a deep dive into your current financial situation. If you expect turnover to increase significantly in the near future, you can also create an operating budget to map out your expectations for the next 3 years.”

Crunching the numbers

These three basic parameters are all you need to calculate your new turnover and profit. Van Beuzekom explains: “Add the new sales from the hire to your current turnover. This will be your new turnover. So: old turnover + new sales from hire = new turnover. To your current profit, you add what the employee brings in before subtracting the costs. This will be your new profit. So: old profit + new sales from hire - employee costs = new profit.”

Essentially, as with other investments, it comes down to costs and benefits

Example  

Suppose you are planning to hire a support officer for 3 days a week and make the above calculation. You already know the costs and predict a small, indirect increase in turnover. After all, you can spend some of the time you save on paid work. Create an overview of the costs, benefits, your current turnover, and your current profit.

It is easy to see that the costs of the employee are higher than the forecast new sales. So while total turnover increases in the new situation, profits fall by about €1000. You could decide to postpone hiring an employee for now. Given everything you stand to gain, however, you could also choose to accept the profit drop. By hiring an employee, you may get to spend more time on the parts of the job that you love while spending more time with your family, too. The stress that told you you needed a new employee will quickly melt away.

Old profit + new sales from hire - cost employee = new profit

The first time

When you hire your first employee, Van Beuzekom says you still have to factor in a one-time start-up investment. “There will be a lot of red tape involved the first time round. All that work will also cost you time and money. For many business owners, hiring their first employee is a big hurdle. Admittedly, many businesses have cold feet at first, but usually hire a second and third employee relatively quickly.

Choose wisely and look ahead

Van Beuzekom often warns business owners that cheap is expensive. “The old saying still rings true in many cases. You can save a quick buck by doing payroll yourself, but if you make a mistake, you will get into trouble later. The same goes for the contract-dependent contributions you have to pay. The unemployment contributions (in Dutch) for open ended-contracts may be lower, but they can be risky. What will happen if your business stops booming next year? Do not skimp on minor amounts like this if there are big risks involved. Make conscious choices and invest with an eye to the future.”

Want personal advice on hiring your first employee? Ask your accountant or a fellow entrepreneur for advice. Or hedge your risks and hire staff through a payroll company.

Starting employers

Curious about how fellow entrepreneurs knew they were ready to hire staff? In our Beginnende Bazen (starting employers) video series, 3 business owners recount the stories of their first hires. The second episode (in Dutch) is all about the financial considerations and how they came to a decision.