Cost Benefit Analysis of Adding New Headcount
When analyzing whether to augment to her staff, a small-business owner attempts to measure and quantify the benefits of the addition. Ultimately she weighs the costs -- recruiting and training costs, salary and benefits -- against the benefits she has calculated, notably how much revenue the additional employees will likely generate. While this is important, she should not ignore the intangible benefits to her organization as well.
In the early stages of a company, a small-business owner often plays many roles -- among them marketing, product development, finance and administration. Adding to the staff can free up the owner's time so he can focus on the tasks that provide the greatest benefit to the company. Hiring an office manager at $35,000 per year may allow the owner to concentrate on marketing and business development. The incremental revenue of, for example, $50,000 generated from his stepped-up marketing activities is likely to more than pay for the new hire's salary resulting in a net benefit of $15,000. If the projected benefit doesn't cover the cost of the new employee, she shouldn't be hired. The owner should always keep in mind how valuable his time is.
Adding additional workers to a production line may allow the small-business owner to increase capacity. For example, each worker earning $28,000 per year could increase inventory by $80,000, which has the potential to increase revenue by an even greater amount. Adding new headcount allows each worker to specialize in one task or element of the production process rather than jumping from one task to another. Over time, the specialists learn to perform their tasks more quickly and with fewer mistakes. The result is greater productivity -- the company can produce more units with a given amount of labor time and labor costs, lowering the cost of production. Additionally, the company may achieve cost savings from less waste of raw materials and not having to discard defective products.
With too little staff, important tasks will not be completed on a timely basis. An extreme example would be losing an important order because the company could not fill it on schedule. In this example, the cost is the additional employee's wages and benefits while the benefit is avoiding lost revenue. One of the best ways for a small business to achieve a competitive edge versus larger competitors is to excel at customer service. If a small-business owner observes that customer questions are not being answered on a timely basis, by adding additional customer service headcount she may keep customers that otherwise would have gone to competitors.
One of a small-business owner's personnel goals is to build the company's pool of talent so as the company grows and becomes more complex to operate, it has the skilled individuals to take on these challenges. Each year during the business planning process, the owner should asses the current capabilities of his team and determine whether they as a group -- including the owner -- have all the skills necessary to take the company to the next level of growth. If not, adding headcount equates to adding higher level skill sets, without which the company may have difficulty keeping up with competitors who are building their own pool of talent. The cost of not having this talent can mean the company losing market share -- which can be much greater in revenue dollar terms than whatever salaries and benefits the new members of the team will be paid.