Episode 54: Should I dip into savings to hire?

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Here’s a framework you can follow.

Welcome to the Business Numbers Podcast. I’m your host, Ben McAdam. I’m a profits coach, virtual CFO, and entrepreneur. And I’ve created this podcast to help you grow your business profits and understand your business numbers without judgment and without burying you in a whole bunch of jargon that you don’t need, just actionable tips and case studies to help you grow your business. For show notes, go to the website, businessnumberspodcast.com.

I’ve created this podcast to help you grow your business profits, and understand your business numbers without judgment and without burying you in a whole bunch of jargon. Just actionable tips and case studies to help you grow your business. For show notes, go to the website, businessnumberspodcast.com.

I just finished a coaching call where the question was “Should I dip into my savings in order to hire?”, and I thought I’d share it with you in case it was helpful.

In this particular scenario, the business owner had a rockstar on their team that was working very few hours and wanted to get them to help out more, so that the business owner could focus on increasing the revenue with that freed time that this particular rockstar was gonna take on more of the tasks from the business owner’s to-do list. And then the business owner could focus on sales. So they wanted to know “Should I increase this person’s hours?”

And in particular the reason why they had to ask was because to increase this person’s hours would require the business owner to dip into savings. The business couldn’t actually afford at its current state, it couldn’t actually afford to pay for those extra hours. 

Often there’s these questions in the business about “should I sacrifice in the short term in order to get a better result that will pay for the sacrifice in the medium to long term?”. And it’s always a very difficult question, but in this particular instance there is a framework that you can follow.

And this is what I shared on the coaching call and so here I am telling you guys in case it is useful.

The first question is (we’ve gotta get real) “What’s the cost?” What exactly is this going to cost you per month? In order to hire this person or in order to make this short term sacrifice that you’re considering, what’s the cost? How much is it going to be: 1,000 a month, 10,000 a month, a 100,000 a month, $10 a month? Whatever it is, what’s the cost as a monthly amount? So what’s the cost.

And then how long until the business will be able to pay for the cost on its own, either because your revenue is just generally trending upwards or because this particular hire is going to directly or indirectly help you improve the revenue or help your team improve the revenue in your business so it will be able to cover the costs.

Does the business either have its own momentum or projects you’re already working on, or does this hire enable you to focus on growing revenue either directly or indirectly. How long will it be? And what kind of a benefit are we looking at? Are you going to be able to increase revenue so that three months from now you will be able to pay for this person without having to dip into savings? Is it that it’s going to take six months? Is it that it’s going to be like a couple of weeks? How long are you going to be dipping into savings?

So you can quantify how much in savings, which is step three, do you have enough savings for this amount of time? So if it’s a thousand dollars a month that, in this particular case is an extra thousand dollars a month that increasing this rockstar’s hours might cost, for example. 

I won’t give you the real numbers, I try to be careful with the confidentiality stuff. A little too careful sometimes. So let’s say it’s a thousand dollars a month. This business owner is thinking of increasing the cost for the rockstar and having that rockstar will enable them to increase the revenue within three months to cover the cost of the rockstar.

I think increasing revenue to be able to cover a thousand dollars a month is…a thousand dollars a month is not a really big hurdle, but just to keep the numbers simple if it’s three months a thousand dollars a month, that’s $3,000. You might need to dip into savings. Now, it probably won’t be 3000 because your revenue will increase a little. So month one you might be a thousand dollars out of pocket, month two you might be $500 outta pocket, month three might be $250 out of pocket. So it’s not $3,000, it might be 1750 in that particular example.

After you’ve worked out that you have enough savings to cover this, then think: do I have more, much more savings than that? So if we think that it’s only 1750, maybe we might say, “Do we have 3000 in savings, just in case it takes longer than I thought to generate revenue?”. Particularly if you’re hiring someone from scratch, you’ve got to onboard them and train them. It might take them a little while to actually free you up to focus on revenue.

So it’s always good to say- “Okay, best case scenario, yes, I have enough money, but what about a slightly less rosy, or worst case, scenario even? Do I have enough savings to cover that?” If the answer is yes, well then sure, go ahead. Just be sensible. 

I’m gonna wrap this up and say: I hope this was helpful as a very simple framework for deciding can you afford to dip into savings? Those are completely separate discussions about whether this is the right hire that fits into your goals, if it’s the highest priority thing for you to focus on, but just simply should you dip into savings to sacrifice for something that’s going to be useful in a certain amount of time. Here’s the little framework that can help you.

If you have any questions about this or anything else, reach out and get in touch, I would love to feature some questions on the podcast. Otherwise I’ll keep sharing useful things from my coaching calls. Thanks for listening.

Thanks for listening to the Business Numbers podcast. Subscribe in iTunes, Stitcher, or on our website businessnumberspodcast.com. Also on the website is a free basic concept webinar and a contact form for submitting questions that you’d like me to answer on a future episode.

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