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Business success is dependent on a solid financial foundation & success looks different to everyone & there is a lack of equity of access to resources and information for small business owners and independent contractors & there is a societal narrative making us believe “balance” is our ultimate goal & … There are so many “&”s that impact being your own boss. Let’s have some frank discussions on the basics of business with a holistic focus on everything that helps business owners define and find success.
Molly Beyer: [00:00:08] Welcome to The Ambiguous &: Business Basics and Beyond, the podcast where we have frank discussions on the basics of business with a holistic focus on everything that helps business owners define and find success. Each episode is a reminder that success isn't one thing, it's a whole lot of ambiguous ands. Like, subscribe, or follow, and let's explore these ambiguous ands.
Molly Beyer: [00:00:35] Hello and welcome to The Ambiguous &: Business Basics and Beyond. I'm your host, Molly Beyer, and I'm here to lead you through frank and holistic conversations on the basics of business. We've talked a lot about business, culture, and building an avatar of the type of employee that will fit in with it. So now I want to shift to the monetary piece of employment and talk about the true cost of an employee, because payroll is really just the beginning. So before we dive into the numbers, let me tell you about one of the most common conversations that I have with business owners about employees, because they come to me super excited about the business growing, they finally reached that point where they can't keep doing everything by themselves, and they hire somebody and everyone celebrates. And for a month or two, everything feels great, and then cash flow starts getting tighter. The owner really does start questioning whether or not they made the right decision. They wonder if payroll is too high or if they hired the wrong person.
Molly Beyer: [00:01:26] More often than not, though, the employee isn't the problem. The problem is that they only plan for the paycheck. Nobody ever helped them budget for everything that comes with having an employee. So the employee wasn't the mistake, really, the math was. I've lost count of how many times I've heard business owners say, I can afford a $25 an hour employee. Can you? Maybe. But here's the thing. A $25 an hour employee never costs $25 an hour. So let's put some numbers to it, because I think this is really where the light bulb usually comes on for people. A $25 an hour employee working 40 hours a week earns roughly $52,000 a year. But that's only the wage. By the time you add employer payroll taxes, workers compensation, unemployment insurance, paid leave requirements where applicable, software subscriptions, equipment training time, and health insurance contributions, or retirement matches, that same employee could easily represent a $65,000 to $75,000 annual investment. And so that exact number really does depend on your business and your location, but the point is that your hiring budget really never does stop at that salary. If that's the number you're using to price your services or to build your budget or decide even when to hire, you're making one of the most expensive math mistakes in business.
Molly Beyer: [00:02:52] So when you're ready to hire that first employee, it really is an exciting time. And you're thinking, ah, I finally have enough work. I'm growing. I need help. And those really are great reasons to hire. But then again, that first payroll hits, the payroll taxes, the workers comp, then unemployment insurance and payroll processing fees, then software license for the additional users, the computer equipment, another Microsoft account, uniforms, training, then the fact that the new employee isn't producing at 100% while they're learning. Suddenly, that math feels like it doesn't work, and it's not because that employee again wasn't worth it, it's because nobody planned for the real cost of that employee. So when you have employees that are visible costs, and then there are the things that we just don't always think about. So obviously, again, those visible costs, those are the ones that people generally remember that hourly wage or salary, overtime bonuses, commissions, easy. Everybody budgets for these. But then we start moving on to those other costs. And this is then where people start to forget things because we have the government costs. There are Social Security taxes, Medicare, federal unemployment, state unemployment, worker's compensation, paid family leave if your state has it paid, sick leave requirements, any local taxes and depending on the business, these really can add that several dollars an hour before you've even bought a single piece of equipment for your new employee to use to actually get the job done.
Molly Beyer: [00:04:23] And so this one is one of the reasons why I encourage business owners to really think about employees the same way that they think about buying equipment. So if you're buying a truck for your business, you really, you just don't budget just the purchase price of the truck because you know that there's going to be insurance, fuel maintenance, repairs, registration. And then of course, there's always going to be some surprises along the way. So employees really deserve that same level of planning because they're an investment in your business. They're really, they're not just an expense. So we've got employee benefits, and again, these are usually underestimated health insurance, dental insurance, vision insurance, retirement matching, life insurance, disability insurance, paid time off, holiday pay, training reimbursements or cell phone reimbursements, mileage reimbursements. And so again, even if you're not offering benefits today, they're often a part of your growth plan. And so you do really want to start thinking about them when you're hiring employees. And then we really start to get to that stuff that nobody thinks about and budgets for because you just think it's a just regular cost of business. And it is, but it's going to increase when you have employees. They need computers, they need desks, chairs, monitors, phones, internet, email, you need another Microsoft 350 or Google workspace account, any project management software, CRM seats, time tracking software, the payroll software to pay them.
Molly Beyer: [00:05:48] If you need scheduling software, there's password managers, company credit cards, uniform safety equipment, business cards. One employee can easily require like ten different software subscriptions. And I do think software is one of the easiest costs to overlook because really, today, almost every software that you have is licensed per user. So one more employee means one more Microsoft account. It's one more QuickBooks user. It's another project management seat. It's another password manager license, another CRM description subscription. And none of those are particularly expensive on their own. But together, they really quietly start to increase that monthly overhead. And then we move into the time costs. And these are huge and rarely taken into account because hiring takes time. Interviewing takes time. Training takes time. Management takes time. Correcting mistakes takes time. Weekly one-to-one's take time. Performance reviews take time, and the owner's time is valuable, too. So if you're spending five hours every week managing someone, that's part of the cost of having an employee, and then there's something that rarely appears on the financial statement. And that's the opportunity cost because every hour you spend interviewing, onboarding, answering questions, reviewing work, or coaching a new employee is an hour that you are not spending selling your services, meeting referral partners, improving your systems or serving your existing clients.
Molly Beyer: [00:07:19] And that doesn't mean management is a bad use of your time. In fact, developing people is truly one of the most rewarding parts of growing a business. But it's still an investment, and it deserves to be recognized as part of the overall cost. And we also have to remember again, that productivity isn't 100%. People assume I hired someone for 40 hours. But did you? Maybe they produced 32 hours a week of billable work. The rest is meetings and training and PTO and breaks and admin duties, internal communication, helping out their coworkers, having equipment issues. And that isn't bad. It's truly just the reality of having employees. So this is also where we need to separate hours worked from the value created by that employee. Because again, a new employee doesn't usually walk in on Monday and operate at full speed by Friday. They're learning your systems, your customers, your expectations and your culture, and that is completely normal. If they were operating immediately at 100% without questioning, I might be concerned about what's going on because maybe they didn't actually learn enough. So building great employees does take time. And that is part of building a great business.
Molly Beyer: [00:08:33] And so why does this matter for pricing? Well, if you're pricing your services, assuming labor costs exactly equal wages, then you're underpricing. If you're deciding whether you can hire based on payroll, then you're underestimating. If you're forecasting cash flows using wages, you're missing a big part of the picture. So let's say you're a contractor estimating a project. You believe your labor costs $30 an hour because that's what you're paying your employee. But after accounting for all the additional expenses of the employee, that employee actually costs your business closer to like $43 an hour. So if the project takes 200 labor hours, you've underestimated that single project by more than $2,000. And so one project might not sink your business. But if you're making that same mistake 20 or 30 times a year, it absolutely can. So that's why understanding your numbers does matter. And this is not to scare you away from growth, but to really help you grow intentionally. In accounting, we often refer to this as the fully loaded labor cost. So that's simply the total investment required to employ somebody, not just what appears on their paycheck. Understanding that number helps you make better pricing decisions, better hiring decisions, and better long term growth decisions.
Molly Beyer: [00:09:51] So a good analogy for thinking about this that most people kind of understand is like what it means to buy a house. People think I can afford a $400,000 house. But again, can you because the mortgage isn't the only expense. There's also the taxes, insurance, maintenance, utilities, repairs, furniture, landscaping. Employees are truly the same way. Salary is that purchase price, ownership costs are everything that comes after. And this is where good systems can create better decision making for you. Because whether you're hiring your first or your 50th employee, it's about collecting enough information to confidently answer questions like, can I afford to hire? And what do I actually need to charge? One of my favorite planning tools is actually a spreadsheet that was originally shared with me by a local score mentor, and that I've used customized over the years to fit my business in the way that I advise clients, and the way I advise my clients. Whenever I'm considering hiring, I don't start by writing a job description. I really start by asking the questions of what salary do I want to offer? What benefits do I eventually want to be able to provide? What equipment are they going to need? How much additional revenue should they be able to support? How long before they are profitable? And how much capacity will this create for my business? Once I have those answers, hiring becomes much less emotional because the numbers just really help tell my story, and then I can project how much new business we're going to need to support that employee and when we should begin marketing to fill that future capacity, and whether it's hiring now or waiting another few months to make the most financial sense.
Molly Beyer: [00:11:32] And that's a very different conversation than simply saying, I think we can afford another person. I've also used these to help clients determine how much they can truly afford to pay people, and also how to set their own desired wages. And every time I go through this exercise with a client, I hear the same thing. It's just, wow. I didn't really realize how much of a difference there was between the actual wage and what they actually cost me. Exactly. That's the point. One thing I also remind clients of is that hiring isn't always the answer. Sometimes the real problem is inefficient systems. Sometimes it's poor pricing. Sometimes it's that there is work that could be automated or outsourced. Other times, hiring is exactly the right move because it really allows the owner to focus on their highest value work, the things that only they can do. So the goal here isn't to hire as quickly as possible. The goal is really to create capacity intentionally, because employees can become one of the greatest investments that your business ever makes. The right employee can increase that capacity. It can improve your customer service. It strengthens cultures and it does really free you up to spend your time growing the business instead of just simply running it.
Molly Beyer: [00:12:50] But that does only happen when you've planned for the full investment instead of just that paycheck. So here's my challenge for you this week. If you already have employees, calculate what one employee is truly costing your business, not just their wage. It's all of those other pieces. And if you're thinking about hiring your first employee, build that budget before you even write that job posting. The businesses that grow sustainably, they're not guessing at this. They're making intentional decisions backed by good information. So I'm going to leave you with this. Employees are almost never as expensive as people fear, and they're also almost never as cheap as people budget. And though neither extreme does help you run your business, the goal isn't to avoid hiring, it's to know the true investment you're making so that your pricing, cash flow, and growth plan truly support it. Thanks so much for hanging out with us again today. We'd love to hear any feedback on today's episode, as well as any requests for future content. Drop a comment or suggestion and join us for more next time for more frank and holistic conversations on the basics of business. Please also like, subscribe or follow so that you never miss an episode. And until next time, I am Molly Beyer and this has been The Ambiguous &: Business Basics and Beyond. Have a wonderful day.