When managing and planning the future of your business and its finances, there are a lot of business operating expenses to consider. Often times, the most significant expense a business has is the one that’s rarely captured correctly. People. One of the most common questions I get is “how do I know if I can afford to hire this person?” Hiring people requires salaries, most companies get that. But, what businesses grossly underestimate is the cost of what a full-time W2 employee is. The fact that employers need to add at least 35% to someone’s salary to get the full picture of what a W2 employee costs is frightening for some.
Know your 3 biggest people expenses
Business Expense 1: W2 worker's benefits, vacation days, taxes, etc.
One of the latest trends in the working world is the gig economy. It’s more cost effective for companies to hire 1099 contractors to get standard work done but the obvious trade off is once that engagement ends, you lose all the training and skills custom to your business that you provided that contractor. On the other hand, when you hire someone as a W2, you’re more secure in that hopefully that employee works out for the long run and everything stays in house but there’s a price for that. You’re incurring additional costs and risk for their benefits, vacation days, employment taxes, and a number of other things. All of these extra costs really add up but investing in people offers the best return for any business. Traditionally, top talent has only gone to companies with the top compensation packages, i,e. Facebook, Amazon, Uber. But now, after all the horror stories of working for companies that take you for granted and work you to the bone have gotten out, that pattern is shifting. Employees respond well to being treated well. So if you want to have the best and brightest working at your business, make sure you have a strong vision, a strong culture, and a strong team, the rest will follow.
Business Expense 2: Long term employment
But back to the topic of people expense, when you’re working them into your model, factor in what employees are costing you today, but also what they’re going to cost you down the line. Keep in mind that in addition to cost of living raises, promotions, bonuses, etc., there are legal requirements to what benefits must be offered based on business size.
So, when you hire someone, do so with their goals in mind. If someone wants to come on as a support manager and wants to stay as a support manager, great. Just make sure everyone is on the same page about it. If someone comes on as a support manager and wants to be the next COO, make sure you detail out what that would require of them as well as the business and that again, everyone is on the same page about it. It is always cheaper to promote within than hire external. And I don’t just mean cheaper to the bottom line. The entire organization will operate better and more efficiently if employees see there is a real path to the top and they won’t be stunted because outside hires keep coming in. And this isn’t just for small businesses. Take a look at Snap and how they’ve had a flood of executives leaving the business over the last year. It’s been widely reported that early employees left the business when outside hires are brought in to take over positions that they feel they should have had.
When evaluating an organization, the successful ones are largely driven by people being bought into the vision. Because a business has its own living, breathing dynamic to it. If you hire someone who isn’t bought into the vision – you’re in for a rude awakening with what that will do to the future of your business. And the smaller the business, the more critical this is.
Business Expense 3: Capital expenditures and office space
This one is very cut and dry so I’ll keep it simple. When you hire someone, all the “little things” like laptops, monitors, cell phones, etc are rarely considered, not to mention the office space for that employee.
If you’re shelling out at least $2,000 for every new employee, and you don’t forecast for those cash outlays, they can put you in a cash crunch at the end of the month. When you’re looking at true capital expenditures like money spent on land, equipment, and buildings, you have to be spot on with how you forecast them because we aren’t only talking about $2,000 differences. But the benefits of putting up the money for the capital expenditures is you can use the depreciation to lower your tax liability every year so make sure you’re factoring all aspects with those decisions. On to Office Space. And these days you can’t talk office space without hearing “coworking” a sentence or two away. Shared office space is great, but it can only take you so far. Having a 30, 40, or 50 person business in a shared space and expecting to have a collaborative or home-base culture is very difficult.
The reality is those coworking spaces offer companies with flexibility but that flexibility certainly comes with a price. When you’re just getting started, you can pay a few thousand dollars a month in rent and be able to accept that fairly easily. But try and upgrade to a private office or room and you’ll see quite a difference with your rent bill. As you model out your growth, make sure you build in office space to accommodate that growth. WeWork lost over $700M the first half of 2018, but they’re continuing to get capital at huge valuations because people know how profitable these workspaces are for them. So make sure you explore the full suite of options. There’s a reason traditional office spaces have survived for so long and you should plan for that as you model out your business growth.
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