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Calculating the Cost of Hiring an Employee

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A woman sitting in a desk listening to her peer.Dreaming about adding a new employee? You’ll get more done and you can serve more customers. But before you start, consider the cost of finding the right person. Here’s some information to help you nail down potential expenses. It’ll help you determine if now is the right time to hire a new employee for your small business.

The Cost of Finding the Right Person

One source puts the average cost of recruiting, hiring and training a new employee at $4,000. Sound like a lot? Your costs may vary but the takeaway is this—be prepared to make an investment if you want to find the right person.

Here are some of the costs that go into hiring a new employee (outside of wages, benefits and payroll taxes):

Recruiting costs

The cost to announce your opening will vary. You can post on a number of websites for free. Local websites attract people who already live in your area. Many websites will go one step further and promote your job to likely candidates, for a fee. Another low-cost option is to post (and promote) vacancies on social media sites like Facebook, Twitter or LinkedIn. Don’t forget that one of the most effective (and least costly) sources is a referral from current employees.

Hiring costs

As you start to narrow the field, you’ll likely incur costs to evaluate the candidate. This can include background checks, credit check, or drug screenings. You might be tempted to save on costs by skipping these, but resist the urge. They can uncover potential issues that will prevent you from taking on a poor hire.

Personal costs

Don’t forget the time you’ll spend in the hiring process. That includes time answering questions, reviewing resumes, scheduling and conducting interviews, or following up on references. That’s time away from your revenue-producing duties. For specialized positions, consider hiring a recruiting firm. They can help search and screen applicants so that your time is spent with only the most qualified candidates.

Training costs

Even the best of candidates will require some training. You might pair them with a more seasoned employee or conduct the training yourself. Either way, you need to account for the cost of their time away from their normal duties. You may also incur costs for training materials, licensing fees, and equipment.

Is This the Right Time?

There are a number of factors to consider when deciding if you can afford a new hire. First, project your sales over the next 12 months. Will you be launching a new product or service? Is a competitor dropping out? You want to identify any factors that will likely result in new customers (and more sales). If you’re not projecting an increase, it may not be the right time.

Assuming you anticipate more sales, consider if more staff members will be needed to handle the increase. Start by looking at your current ratio of staff to sales. Could you handle the increase by being more efficient with current staff or will you need to add capacity?

Then add the additional hiring costs above to your overhead costs to estimate whether you can still turn a profit. Remember that it may take several months before you realize the full benefit from your new hire. It’s also a good business practice to maintain a contingency reserve in case other factors arise.

Bringing on a new employee can help your business grow. But it requires an investment to realize the full benefit. Consider the cost of hiring a new employee before deciding whether now is the time to add new staff.

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