When a small business employs another person it can be a very big decision. Recruiting the right person in any business is crucial, however in a small business this decision can have a huge impact on the bottom line almost immediately. A great way to get meaningful information is to use a ratio known as “wages to revenue” to determine the right timing for your next hire.
Key Takeaways
- Small business hiring decisions have immediate bottom line impact unlike large companies
- Use the “wages to revenue” ratio by dividing wages paid by total income to guide decisions
- Consider whether increased workload is short-term, seasonal, or a long-term trend
- Ensure new hires will maintain or decrease your wages to revenue ratio
- Factor in training time and productivity ramp-up when calculating true hiring costs
Why Small Business Hiring Decisions Matter More
If you are fan of statistics, you can make it sound very impressive: “I grew my company by 25% last quarter.” Really what did you do? Oh I employed my fourth team member! When a large business employs another person the decision can be far less significant, for example if they already have 100 employees and then employ one more person the impact on the increase in wages is minimal.
For small businesses and tradies, every hire counts. That’s why I work with business owners through my Ultimate Tradie Business Transformation to make these decisions strategically rather than emotionally.
What Is the Wages to Revenue Ratio?
A great way to get meaningful information is to use a ratio known as “wages to revenue”. In other words, you divide the amount you are paying out in wages by your total income.
If wages to revenue is trending up this could be a good indication that you are overstaffed or you may be understaffed and are paying out lots of extra money in overtime! If it is trending down this could be a great sign, however you also need to be aware that your staff aren’t being over worked, and are becoming fatigued or that service levels and quality have dropped.
What’s a Good Wages to Revenue Ratio?
Clients often ask me what is considered a good wage to revenue ratio? There are a number of industry benchmarks that you can refer to. However, benchmarking data is made up of both great businesses and bad businesses. It’s a bit like asking what is the average price of a house in a neighbourhood. It could include the multimillion dollar mansions right down to a dilapidated old house. Benchmarking data is just a starting point.
A couple of years ago I was working with four businesses all part of the same franchise. Even their figures differed quite significantly and it was just based on the way each owner chose to run their business. An acceptable range differs from business to business, so it’s on your average.
According to the Australian Bureau of Statistics, labour costs typically represent 20-40% of revenue for most service businesses, but your specific ratio depends on your industry and business model.
Three Key Questions Before Hiring
Once you have established an average and you can see which way the numbers are trending you can then consider the following three points:
Is This Just Short-Term Increased Workload?
Is this just a short term occurrence in an increase in workload or a particular project? If it is you might be better off not employing that extra person.
Are You Experiencing Seasonal Fluctuations?
Is this a seasonal fluctuation and can you see some quitter periods coming up? If this is the case, you may be able to reach an arrangement with your team where you can offer time off in lieu. Just check you are staying on the right side of the law when doing this.
Can You Increase Current Productivity Instead?
Is this a long term trend and if so how can we increase current productivity? Look at how your work space has been set up. Think about where there may be double handling and inefficiencies and how you can better streamline processes and procedures. You may also consider whether it would be better long term investing in new equipment and technology to make things more efficient.
The Two Final Questions
If the answer is no to the questions above the two questions you want to ask is:
Will This Person Help You Make More Money?
Will my “wages to revenue” at least remain the same or possibly decrease by employing an extra person? In other words, will this person help me make more money compared to the extra money I am paying out in wages.
How Long Will Training Take?
How long will it take? When employing a new person, it takes time to train them and for them to become a productive team member. By being realistic about what this time frame is you can work out how much it really is going to cost and whether it’s worth it.
This is where my Recruit Right Programme helps business owners not just hire the right people, but onboard them effectively to minimise this productivity gap.
Making Data-Driven Hiring Decisions
When you are able to analyse some of the key numbers by looking at how they are trending you will be able to make better decisions. Get started today and either on a weekly or monthly basis start to track your “wages to revenue” and the next time you feel the need to employ someone you will be able to make an informed decision.
Bigger is not always better and you want to make sure that by employing an extra person it makes good financial sense.
Frequently Asked Questions
What’s the ideal wages to revenue ratio for my business?
There’s no universal ideal ratio as it varies by industry and business model. Focus on tracking your own ratio over time and ensuring it remains stable or improves when you hire. Most service businesses operate between 20-40% of revenue on labour costs.
Should I hire if I’m constantly paying overtime?
Not necessarily. First calculate if the overtime costs are higher than hiring a new employee, including training time and benefits. Sometimes overtime for short periods is more cost-effective than permanent staff.
How long should I expect it to take for a new employee to become profitable?
This varies by role and industry, but typically 3-6 months for most positions. Factor in recruitment costs, training time, reduced productivity during learning, and the time it takes for them to generate their full revenue potential.
What if my wages to revenue ratio is trending upward?
An upward trend could mean you’re overstaffed, paying too much overtime, or your revenue has dropped. Analyse which factor is the cause before making hiring decisions. Sometimes the solution is better productivity, not more staff.
Can I use part-time or casual staff instead of full-time employees?
Absolutely. Part-time or casual arrangements can be perfect for managing seasonal fluctuations or testing whether you need permanent staff. Just ensure you comply with Fair Work Australia regulations regarding casual loading and entitlements.
Making smart hiring decisions is crucial for maintaining a strong, profitable business. If you’re struggling with staffing decisions or want to improve your business systems, I’d love to help you gain the clarity and confidence you need. Get in touch today to discuss how we can maximise your business potential.