The Simple Math Behind Budgeting for New Employees

Author

Benjamin Morone
August 23, 2024

Hey everyone,

Budgeting for new employees can feel overwhelming, but it doesn’t have to be. In this email I’ll break it down to a simple actionable framework that makes it easy to hire the right talent without torching your profit margins.

Most advice out there on hiring doesn’t address one critical aspect: how to actually budget for employees. Without a proper budget plan, you risk shrinking your profit margins or even missing out on growth opportunities.

Here’s a quick guide to getting it right:

The Basics of Employee Budgeting:

First, let’s keep it simple: Your revenue should be 5 times the wage of the employee you want to hire. This is based on maintaining a healthy 30-40% profit margin, which is realistic for most service-based businesses.

For example, if your business is generating $10K a month, you should aim to allocate no more than $2K toward a new hire. This 5x rule ensures you’re still hitting your profit targets even after hiring.

But hiring isn’t just about breaking even—you want growth, right?

The 7x Rule: Hiring for Growth

When hiring, aim for a 7x return on investment (ROI). This can happen in one of two ways:

  1. The new hire directly brings in revenue 7x their salary.

  2. They free up your time so you can generate 7x more revenue.

For example, if you hire someone at $2K per month, they should either generate $14K in additional revenue or free up enough of your time for you to do so. Even at a 30-40% profit margin, this would yield an extra $4,200 to $5,600 per month in profit—a huge return on your investment.

Why Outsourcing Talent is Key

Getting a 7x return is challenging with local talent due to higher wage expectations. That’s where outsourcing comes in—by leveraging global talent, you can achieve high-quality results at a fraction of the cost.

In Summary:

  • Revenue should be 5x the wage of the employee you’re looking to hire.

  • Look for hires that will generate a 7x return either through increased revenue or by freeing up your time.

Mastering this simple budgeting strategy will allow you to hire strategically and scale your business without stressing about your profit margins.

Great Content Related to Hiring:

How We Can Help

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  • Our team has hired hundreds of candidates and saved millions on payroll for our clients. If you want expert guidance on how to hire and grow efficiently, click here and let’s chat.