Can You Afford to Hire a New Field Employee?
Originally published: 11.01.12 by Ruth King
Using this formula and asking questions about new business and overtime costs will provide an answer.
Your company is growing. You feel the need to hire another field employee. I define a field employee as one who generates revenues for your company. Can you afford to hire this person? Find out by using the mathematical calculation described below.
Here’s the calculation:
1. Determine the hourly wage that you will pay the field employee.
2. Convert the hourly salary into a total annual wage.
3. Add benefits (FICA, Medicare, etc.).
4. Add truck costs if the field employee will be driving a truck.
5. Determine the gross margin (GM) of the department that the field employee works in.
6. Enter the date into the formula:
Sales required = Total Cost
For example: You want to hire another service technician:
1. His hourly wage will be $20 per hour.
2. This is $41,600 per year (assuming no overtime).
3. Assume his benefits are 30% of his salary, equaling $12,480.
4. His truck costs $20,800 per year to operate (assume $10 per hour).
5. Gross margin of the service department is 53%.
$74,880 = $74,880 = $159,319.15
This technician must generate a minimum of $159,319. Can he do it?
Here are the questions to ask to make a decision:
1. Is there enough work that the company can’t get to within a reasonable period of time to cover this amount of revenue?
2. Are the other technicians generating enough billable overtime each week that would stop with the addition of this service technician?
3. Can you do enough marketing, i.e., make the telephone ring with customer needs, so that the technician can generate $159,319? Or, will there be periods of time that he is laid off?
Look at the overtime issue carefully. Assume that the technicians, as a group, are averaging 40 billable overtime hours per week. Then, without a doubt, the additional technician would cut your overtime costs to almost zero. You would generate billable hours at regular rates, thus increasing the department’s bottom line.
But, what if the technicians, as a group, are averaging 20 hours of billable overtime hours per week? Then you need to look at your average service revenue per hour to determine if hiring this technician makes sense.
Assume that your average service revenue per hour is $200 per hour. At 20 billable overtime hours per week, that is $4,000 per week in revenue at overtime rates. It is $208,000 in yearly revenues. With $159,319.15 in revenues needed, you can still hire this service technician under the assumptions described above.
If you think that he can’t generate the revenues, or there are not enough billable overtime hours, or you think that you cannot do enough marketing, then it is best to wait until business picks up enough so that he can be productive for you.
Here's the calculation if you're thinking about hiring a new office employee.
Ruth King has over 25 years of experience in the hvacr industry and has worked with contractors, distributors, and manufacturers to help grow their companies and to become more profitable. She is president of HVAC Channel TV and holds a Class ll (unrestricted) contractors license in Georgia. Ruth has authored two books: The Ugly Truth about Small Business and The Ugly Truth about Managing People. Contact Ruth at firstname.lastname@example.org or 770-729-0258.
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