Should I Hire? Doing the Math on Your First Employee
Short Answer: You can afford a hire when the extra work that person makes possible brings in enough gross profit to cover their full cost. Divide the yearly cost of the hire by the share of each revenue dollar left after your other direct costs; that's the new revenue they have to support. Then check two more things: what happens to your profit if the work doesn't come, and whether you have the cash to pay them before customers pay you.
Most owners decide to hire when they feel stretched: too many jobs, not enough hands, the owner working evenings to keep up. Feeling stretched means there's work. It doesn't tell you whether the work pays for the person. Three numbers do.
How Much Revenue Does a Hire Have to Bring In?
Start with the full cost of the person for a year. Then ask how much revenue it takes to cover it, after the other costs that come with more work: materials, fuel, supplies.
Revenue needed = cost of the hire ÷ (1 − other direct costs as a share of revenue)
Take a hypothetical landscaping company, Greenline Landscaping: one owner, a crew of four, two trucks, about $520,000 a year in revenue and $114,000 of profit before paying the owner. The owner is turning away work in June and July and is weighing a fifth crew member at about $50,000 for the season.
Greenline's direct costs, beyond crew wages, are materials and fuel:
| Other direct costs | Amount |
|---|---|
| Materials | $90,000 |
| Fuel and equipment running costs | $42,800 |
| Total | $132,800 |
| As a share of $520,000 revenue | 25.5% |
So every new dollar of revenue carries about 25.5 cents of materials and fuel, leaving 74.5 cents toward the new person's wages.
$50,000 ÷ 0.745 = about $67,000 of new revenue a year
Over a season that runs April through October, that's roughly $9,600 a month of work Greenline isn't doing today. If the owner is already turning that much away, the hire covers itself.
What Is the Full Cost of an Employee?
The wage is only the start. On top of a paycheck, an employer pays its 7.65% share of Social Security and Medicare, state and federal unemployment tax, and in most states workers' compensation insurance, which is expensive in physical trades. Add equipment, uniforms and the hours spent training.
If Greenline's $50,000 is the paycheck alone, the employer's 7.65% adds $3,825, and the revenue needed rises to about $72,000 before counting insurance. Get a workers' comp quote before deciding; it can change the answer.
What If the Work Doesn't Come?
The break-even number is the middle case. A decision needs the good case and the bad one too:
| New revenue the hire supports | Change in yearly profit | Profit before owner pay |
|---|---|---|
| $40,000 (the work falls short) | −$20,200 | $93,800 |
| $67,000 (break-even) | $0 | $114,000 |
| $130,000 (as productive as today's crew) | +$46,800 | $160,800 |
Today each of Greenline's four crew members supports about $130,000 of revenue. If the fifth matches that, profit rises by $46,800. If the work falls short and the new person supports only $40,000, profit drops to $93,800, about $27,000 under the $120,700 the owner needs to cover household pay and what the business keeps after tax (see How Much Should I Pay Myself). Even the break-even case leaves Greenline where it is today, about $6,700 short of that target. For the hire to close the gap as well, it has to bring in about $76,000 of new work.
The spread between those rows is the real risk of the hire. It's why the question to answer first is whether the work is already there.
Do I Have the Cash to Hire?
Payroll goes out every week or two. Greenline's commercial clients pay 30 days after the invoice. So a new crew member in April gets paid for a month or more before the commercial work they did turns into cash, which is exactly the gap described in Profit Is Not Cash.
At $50,000 over a seven-month season, the new person costs about $7,100 a month. Greenline ended its last April with $4,500 in the bank. Hiring into that without a cushion puts payroll at the mercy of one slow-paying client. The owner would want at least a month of the new wages set aside before the start date.
What If It Really Is Your First Employee?
The math is the same, with one addition. When a solo owner hires, some of the benefit is the owner's own time: hours freed from doing the work can go into selling, quoting and managing. If the hire lets you take on $67,000 of new work, or frees enough of your week to win it, the numbers above apply. If it only means you work less for the same revenue, the hire costs you profit, which can still be the right call, as long as it's a choice you've priced.
A second thing changes at the first hire: you take on payroll, withholding and payroll tax filings for the first time, so budget for a payroll service.
What to Look For
- Work you're turning down. Count the jobs you declined or pushed out in the last season. That's the evidence the revenue exists.
- Revenue per crew member. If it has been falling, adding a person spreads the same work thinner instead of adding capacity.
- Equipment limits. Greenline's fifth person can join an existing truck as a crew of three. A sixth would likely need a third truck, which changes the math entirely.
What a Finance Consultant Would Do Next
A consultant looking at Greenline would put a number on the work turned away last season, get a real quote for workers' comp, and test the hire at three levels of new revenue against the owner's $120,700 profit target. Then they would map the cash, month by month, from the first payday to the first commercial payment the new crew member's work produces.
That analysis is what Occam's Model runs on your own books. It lets you add the wages and the new work to a copy of your business, see the change in profit and cash flow next to your current numbers, and, in a plan built from a copy of your books, forecast month by month how long your cash lasts before you commit. When you need extra help, an expert can review it with you.
Common Questions
How much revenue do I need before hiring my first employee?
Enough extra work to cover the full cost of the person after your other direct costs. For a
business where materials and fuel take 25 cents of each dollar, a $50,000 hire needs about
$67,000 of new revenue.
Should my first hire be part-time?
Often, if the work is seasonal or uncertain. A part-time or seasonal hire cuts the downside in
the table above while you find out whether the work is steady.
Is it cheaper to use a contractor than an employee?
Sometimes, but the choice isn't only about cost. Whether someone can be treated as a contractor
depends on how the work is controlled, under IRS and state rules, so check with a tax
professional before choosing.
When is the right time of year to hire in a seasonal business?
Just before the busy season, once you've set aside enough cash to cover the first month or two
of wages before customer payments catch up.