Can I Afford to Take on My First Employee?
Taking on your first employee can be an exciting step. It can also feel like a big financial commitment.
So how do you know if your business can afford it?
The key is to look beyond the employee's salary. You need to consider the total cost of employment, whether your cash flow can support that cost every month, how much additional capacity the employee will create and whether that capacity is likely to generate enough value for the business.
For a growing small business, the right question isn't simply “Can I afford the salary?”
It's “Will employing someone leave my business financially stronger?”
How Much Does an Employee Really Cost?
The salary is only part of the cost.
Depending on the employee and circumstances, you may also need to budget for:
Employer National Insurance
Workplace pension contributions
Holiday pay
Statutory employment costs
Payroll administration
Equipment
Software licences
Training
Insurance
Workspace
Recruitment costs
Some of these will be one-off expenses. Others become ongoing commitments.
Before recruiting, calculate an estimated annual and monthly total employment cost, rather than basing the decision on salary alone.
HMRC provides current guidance on PAYE and payroll for employers, while The Pensions Regulator explains employers' workplace pension responsibilities.
How Much Employer National Insurance Will I Pay?
This is an important part of the calculation because employer National Insurance can add significantly to the cost of employing someone.
The amount depends on current rates, thresholds and the employee's circumstances.
Rather than hard-coding rates into a business planning article that may quickly become outdated, use HMRC's current guidance when calculating your likely cost.
It's also worth checking whether your business may qualify for Employment Allowance, which can reduce eligible employers' National Insurance liability.
HMRC's current Employment Allowance guidance explains the eligibility requirements.
Do I Need to Provide a Workplace Pension?
Most employers have workplace pension responsibilities.
If an eligible employee needs to be automatically enrolled, the business will normally need to make employer contributions as well as dealing with the administrative requirements.
Again, don't treat this as an afterthought.
Include pension costs when estimating the real monthly cost of employing someone.
Can My Cash Flow Support Another Salary?
This is where the decision becomes more interesting.
Imagine the business has had three excellent months and there's plenty of cash in the bank.
Does that mean you can afford an employee?
Not necessarily.
Ask:
Is current income sustainable?
Are sales seasonal?
What happens during quieter months?
Are large tax or VAT payments approaching?
Do customers normally pay promptly?
How much cash would remain after recruitment?
Could the business continue paying the employee if sales temporarily fell?
Employees need paying every month, not just during the good ones.
A simple cash flow forecast can help you model the impact before you commit.
Does the Employee Need to Generate Their Own Salary?
Not always.
This is an important distinction.
If you're recruiting someone into a directly revenue-generating role, you might reasonably expect their work to contribute towards additional sales.
But an administrator, bookkeeper or operations employee may create value differently.
They might:
Free up your time
Improve customer service
Increase capacity
Reduce delays
Improve systems
Allow you to concentrate on higher-value work
Make it possible for the business to take on more customers
So don't only ask:
“How much revenue will this person generate?”
Also ask:
“What will this person enable the business to do that it can't do now?”
Is Being Too Busy a Good Reason to Recruit?
It can be – but first understand why you're too busy.
Recruitment is an expensive solution to an inefficient process.
Before adding another salary, look at what's consuming your time.
Could some work be:
Automated?
Eliminated?
Outsourced?
Delegated differently?
Made more efficient with better software?
Standardised?
If you've done that and demand still exceeds your capacity, recruitment becomes a much stronger proposition.
If you haven't, you could simply employ somebody to help manage an inefficient way of working.
Should I Employ Someone or Outsource the Work?
Your first employee isn't always the best option.
For some functions, outsourcing can provide additional capacity without immediately committing to a permanent member of staff.
This might apply to areas such as:
Bookkeeping
Payroll
IT
Marketing
HR
Administration
That doesn't mean outsourcing is always cheaper or better. But it could be an easier route to solving your biggest problems.
Compare the actual options.
Consider cost, expertise, control, flexibility and how central the role is to your business.
For example, using professional bookkeeping services may make more sense for some businesses than employing someone internally purely to manage financial administration.
How Do I Work Out Whether an Employee Is Affordable?
A simple starting point is to model three scenarios.
1. What happens if sales stay the same?
Can the business absorb the additional cost and remain comfortably profitable?
2. What happens if sales increase?
How much extra capacity could the employee create, and what could that mean for revenue and profit?
3. What happens if sales fall?
Could you still comfortably meet wages and other commitments?
This doesn't require a complicated financial model.
The aim is to understand how much breathing room you have.
What Other Responsibilities Come With Becoming an Employer?
Your financial forecast isn't the only consideration.
Becoming an employer brings legal and administrative responsibilities too.
Depending on your circumstances, these can include:
Registering as an employer with HMRC
Operating PAYE
Checking an employee's right to work
Providing required employment information
Paying at least the applicable minimum wage
Workplace pension duties
Employers' liability insurance
Keeping appropriate payroll records
GOV.UK's Employing people: a step-by-step guide is a useful official starting point.
For employment-law or HR matters outside your accountant's expertise, appropriate specialist advice may also be needed.
When Is the Right Time to Employ Someone?
There's no single financial figure that tells you it's time.
But there are some useful indicators.
Recruitment may be worth considering when:
Demand is consistently exceeding your capacity
You're regularly turning profitable work away
Too much of your time is spent on lower-value tasks
Customer service is being affected by lack of capacity
There's a clear role for the person you're recruiting
The financial forecast supports the additional cost
You have enough cash to cope with less favourable months
Notice the word consistently.
One exceptionally busy month isn't necessarily evidence that you need another employee.
Look for a sustained business need.
What Should I Ask My Accountant Before Recruiting?
This is exactly the kind of business decision worth discussing with your accountant before you make it.
Useful questions include:
What will this employee really cost the business?
What happens to our monthly profit?
What additional payroll costs should I allow for?
How much extra turnover would we need?
Can our current cash flow support it?
How much cash should we retain as a buffer?
What happens if sales are lower than expected?
Are there tax or payroll considerations I haven't included?
You can then make the commercial decision with much better information.
Purple Accounts provides payroll services alongside accountancy support for small and growing businesses.
As a Warrington accountant, we want business owners to understand the financial implications of decisions like recruitment – not discover them afterwards.
Is Taking on Your First Employee Worth It?
It certainly can be.
The right employee can create capacity, bring new skills into the business and give the owner more time to concentrate on the work that matters most.
But being busy isn't enough on its own.
Understand the true cost. Look at your cash flow. Think about what additional value the role will create. Stress-test the numbers.
Then decide.
Because taking on your first employee shouldn't simply make your business bigger.
It should help you build a better business.
