With the economy slowly improving and leads increasing, you may be contemplating how much easier life could be if you added staff. But in my experience, many owners make the mistake of imagining they can hire a few more lead carpenters and immediately boost revenue and profits. Sadly, it’s not that easy.
Don’t hire more workers simply because you feel overworked. The decision has to be based on your company’s past history and reasonable future projections as well as predictions of how much profitable growth a new employee can provide. Here’s how to decide when to pull the trigger.
First, examine your company’s overall capacity. If your entity does $1.2 million in annual volume at your budgeted gross profit margin and all field employees are working full time, then current capacity is $1.2 million per year.
Now let’s say you’ve decided you want to generate $1.4 million next year and believe it already takes all you’ve got just to make $1.2 million. That means generating the extra $200,000 will require that you increase your capacity. You might be able to do that by increasing the percentage of work performed by trade contractors, though subs can be hard to control. You also might be able to improve current efficiency, but even a 10% increase can be tough, and you’re seeking a 16% gain. So let’s focus on adding personnel.
Start by figuring the potential capacity for a particular type of hire. In our example, we’ll use a lead carpenter. Compute the average volume for each full-time equivalent (FTE) lead carpenter that held that position in your company last year.
This might sound simple — you’d think all that’s needed would be to divide gross revenue by the number of field employees. But rarely do all employees start work Jan. 1 and then put in 40 hours each and every week. Instead, you need to convert the actual number of workers into FTEs. Do this:
Add up vacation time, paid holidays, regular staff meetings, and other nonproductive work or downtime for all employees. Divide by the number of employees to get an average. Subtract the average nonproductive hours from 2,080.
Total all of the hours worked by all field employees last year, then divide the total by the “hours available.” This gives you total FTEs.
Let’s say your company had 5.3 FTE lead carpenters last year producing $1.2 million worth of work (that’s work produced, not billed). Each FTE therefore produced about $226,000 of annual volume.
If your goal for this year is $1.4 million, and each FTE generates $226,000 worth of work, you’d need to increase the number of lead carpenters to 6.2 FTEs. Don’t worry about the odd numbers — of course you can’t hire nine-tenths of an employee. The point of this calculation is to determine the amount of risk represented by change. And in my experience, adding one staffer is a reasonable way to hit your new goal.
Now see what happens if you try to make a bigger leap in volume, which to me is anything above 20%. Say you want to rise to $1.8 million from $1.2 million — a 50% climb. At your current capacity, you’d need to hire 3.5 new FTEs. Even if through efficiencies you could increase each of your FTE’s production by 10%, to roughly $250,000 per year, you’d still need 7.2 FTEs, or nearly two more than you now employ.
One at a Time
I’ve found that while hiring any field employee is always fraught with risk, hiring more than two at once is not only risky but downright dangerous.
This is in part because, no matter how good the hire, it takes between six and eight months to fully integrate any new worker into the routines and culture of your company.
During the training period, you can’t expect the new employees to produce at capacity or at standard gross profit margin. And inefficiencies experienced during this time multiply when too many new team members are hired at once.
—Judith Miller is a Seattle-based business consultant and trainer.
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