Here’s How to Tell If Hiring Makes Financial Sense

Hiring - freedigitalFor a moment let’s ignore all the human and emotional aspects of hiring employees and take a close look at the numbers. In other words, why does it make financial sense to hire when: it is so difficult to train; hiring creates a huge distraction to personal production, and; knowing most of those we hire will fail?

For this article I am going to utilize my internal ratios that I have tracked over the last eight years and more than $8 million in gross revenue. To be clear, these ratios include the time as a rookie office when I opened with three green recruiters. And obviously my numbers have been significantly influenced by the great recession. I am confident that my ratios will naturally improve as I accumulate more experience in this industry and time during strong markets.

This is what I know today:

  • It takes five hires to find one producer. I define a producer as someone who will generate more than $150,000 revenue for my office.
  • My average lifetime production per producer is $506,800, and increasing with tenure. The average tenure of all the producers works out to be about 2.1 years. The average annual revenue per producer is $240,000.
  • I pay a salary of $2,000 per month.
  • My average length to termination of employment for non-producers is 6.4 weeks.
    • This creates a loss for each failed hire of approximately $3,200. That is calculated at $500 per week for 6.4 weeks.

Therefore, for each producer I must be willing to invest $16,000; five hires at an average investment of $3,200 each.

Going a bit deeper, I also know that I can control this loss by managing properly. My focus on managing my office growth process is as follows:

  • Interviewing and selection.
  • Setting accountability early and often – activity/volume levels.
  • Training and onboarding appropriately – investing my time.
  • Holding them accountable to adherence to the “system.”
  • Forcing electronic database development (both the completion of profiles and attachment of documents such as resumes).
  • Developing niches and working tandem.
  • Leadership and motivation.

Your investment of time in training rookie search consultants is critical. Many will not have any experience in recruiting. And yes, this time will be expensive. In most cases the opportunity loss from time spent away from your desk is the most significant expense in hiring. And if you are a big biller, your time away becomes even more expensive. But this may be mitigated by putting new hires in niches somewhat in tandem with the office. Then, by forcing them to capture every piece of data into your database, chances are their inventory will be usable to someone in the office.

When I look back at all the hiring I have done for the office I find that my average producer created about $506,800 in lifetime production. That is a phenomenal return of investment considering my average initial hard dollar investment is $16,000.

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On the surface I would say that is huge! But I believe it gets even better when we analyze what adding a producer does on the accounting side. What is really interesting is the efficiency gained for every hire above one. That first employee is expensive. All the fixed costs such as rent of an office begin with that first employee.

What is exciting is that after that first employee, those fixed costs are spread out over multiple producers. In effect, each hire becomes more profitable.

TFL July 2013 - Gibbens chartLet’s assume fixed expenses are $7,000 per month and you have room in your office for seven producers. Let’s assume you pay 45% commissions, creating a gross profit of 55%, and your PDA (Per Desk Average or average revenue per producer) is $240,000 annually or $20,000 per month. The chart tells the story of your effective margin per producer.

Looking at this schedule reflects an amazing efficiency gained by going from one to two to three producers. Obviously, at some point the growth creates limitations. In our example, if you wanted to go to eight producers you would need to increase the fixed costs because you would need more office space to rent. And at some point, the number of employees becomes a bigger burden on your ability to bill on your own desk. Hopefully, understanding the nature of spreading fixed costs over producers will help analyze what would work well for your business.

Illustration courtesy of David Castillo / FreeDigitalPhotos.net

Bill Gibbens is managing partner and co-founder of Global Recruiters of Victoria, a contingency search firm headquartered in Victoria, Texas.The office achieved top honors in 2010 as the leading firm in revenue for GRN?s 180 office global network. The office has been home of four National Rookie Search Consultants of the Year and home of three National Search Consultant?s of the Year. Gibbens has twice earned the National Manager of the Year honors.

A CPA with a background in banking and accounting with KPMG, Gibbens currently operates a desk and is growing his firm. He frequently shares his experience speaking at national recruiting engagements and training forums and may be reached at bgibbens@grnvictoria.com.

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1 Comment on “Here’s How to Tell If Hiring Makes Financial Sense

  1. Bill,

    Your article touches on something I’ve been thinking about, and starting to plan for.

    I’d eventually like to help others earn a living, and increase my earnings through others. I went out on my own at the beginning of this year. My personal earnings should clear six figures this year, and I see no reason why they shouldn’t continue increasing; in my mind I am probably a year or two away from hiring someone else, although some admin help sounds pretty good right now.

    Can you expand on the topic for me?
    1. Is there a benchmark number of earnings for an owner before bringing someone else on board?
    2. How much money is appropriate to have stock piled as you churn through the first new recruits?
    3. What else do you wish you would have known, before hiring someone on for the first time?

    -Dan Schueller

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