Your first hire: how to tell if you can afford one

You are turning work away or working evenings to keep up, and a first hire looks like the obvious fix. The risk is paying a salary before there is enough billable work to cover it. This post gives you a way to check the numbers first: the real monthly cost, the hours needed to break even, and the cash gap while the new person gets up to speed.

Start with the full monthly cost

Salary is only part of the cost. Add what you pay on top of it, and what the person needs to do the job.

Say a hire costs $4,500 a month in salary. Suppose employer costs such as taxes and benefits add 20% in your situation. That figure varies by place and by contract, so replace it with your own number. The loaded cost is 4,500 x 1.20 = $5,400.

Add tools and equipment, such as software seats and a laptop spread over its life. Say that is $150 a month. The total is 5,400 + 150 = $5,550 a month.

If you are comparing this with using freelancers instead, see how to manage freelancers and contractors. A contractor is paid per hour or per task, so the cost follows the work you have.

Convert the cost into billable hours

Divide the monthly cost by your billing rate to see how many billable hours the hire must work to cover themselves.

At $100 an hour, 5,550 / 100 = 55.5 hours a month. That is the break-even point. Every billable hour above it adds to your profit, and every hour below it is a loss.

This is a floor, not a target. It covers the hire's own cost only, with nothing left for your overhead or your own pay. For a fuller view of overhead, see how to calculate your overhead rate.

Estimate the hours they can really bill

Assume a full-time month has 160 working hours (40 hours x 4 weeks). No one bills all of them. Meetings, admin and training take time. The share they can bill is their utilization, and the right target depends on the role. Billable utilization explains how to calculate it.

Say you plan for 60%. Then 160 x 0.60 = 96 billable hours a month. At $100 an hour, that is 96 x 100 = $9,600 in billings.

Subtract the monthly cost: 9,600 - 5,550 = $4,050. In this example, once the hire is fully productive, they add about $4,050 a month before overhead. That is a good sign, but it only counts if there is enough work to fill the 96 hours.

Plan for the ramp-up

A new hire is not productive on day one. Expect a period of training and slower work.

Say the first two months run at half speed. Billable hours are 96 x 0.50 = 48 a month. Billings are 48 x 100 = $4,800. Against a cost of $5,550, the result is 4,800 - 5,550 = -$750 each month.

Over two months the dip is 750 x 2 = $1,500. That is the cash you need to have available before the hire pays for themselves. Keep in mind how cash flow works in a small business: late client payments can make this gap longer than planned.

Your own time also goes into training. See how to onboard a new hire in the first two weeks to keep that time short and focused.

Check demand before you commit

The calculation above assumes there is work for 96 billable hours a month. Check that against your own pipeline and current load.

• Current overflow. How many hours a month are you turning away or doing outside normal hours?
• Booked work. How many hours of signed work do you have for the next three months?
• Likely work. How much does your pipeline add, discounted for deals that may not close?

A simple test: if signed work covers the break-even hours of 55.5 a month for the next three months, the risk is lower. If it does not, consider a contractor or a part-time hire first. Capacity planning shows how to compare hours available with hours needed.

Build a cash cushion

Put the numbers together. The ramp-up dip is $1,500. Add a cushion of three months of the hire's full cost in case work slows: 5,550 x 3 = $16,650. Together that is 1,500 + 16,650 = $18,150.

You do not need this entire amount in the bank, but you should know the figure and be comfortable with how much of it you have. If the number makes you uneasy, a smaller step, such as a part-time person or a contractor on a fixed number of hours, is a reasonable choice.

Write down the decision

Before you hire, record the assumptions: cost per month, utilization, ramp-up length, and the signed work that supports the role. Review after three months and compare them with what happened. Tracking billable hours per person helps; HireOrSell records time against projects on its paid plans, and you can check the pricing page for current details.

This post is general information, not legal, tax or employment advice. Employment costs and rules differ by place, so check with a qualified adviser.

Next step

Fill in the five numbers for your own situation: loaded monthly cost, billing rate, expected utilization, ramp-up length and signed work for the next three months. If signed work covers the break-even hours and you can fund the ramp-up dip, you have a firm basis for the hire.