If you are growing your service based business and wondering if there is a magic way to know when or if you should hire, you are in the right place. While there are a few factors that will influence this decision making, there is a way to map out how and when to add to your team to promote profitability. Hop on board, we are about to lay out the ways of understanding the dynamics of the digital agency that influence hiring decisions.
The Basic Factors Involved
Firstly, the basics of your business need to be mapped out to assess your numbers. We outlined the intricacies of each in earlier articles. In short, you need to know what to charge, specific agency business metrics as a whole, to assess your profitability potential. We will be using the KPIs that a digital agency will be reviewing to help us make a good decision when it comes time to hire.
Looking forward to business growth, hiring is the next obvious step, but many companies make a very costly mistake by hiring too much, too soon. The best way to avoid this, is to assess your business data properly and make informed decisions.
The first item that needs to be assessed and understood in the hiring process is your projected sales. For Accountfully clients, we have a Sales Pipeline tab in our Digital Agency Workbook that will show the sales stats in an organized fashion. Most companies will be on top of this number anyway, but it is good practice to map out current sales (and clients), projected new clients, revenue churn and how that looks from a revenue perspective.
Blended Billable Hour Rate
Understanding Your Blended Billable Hour Rate is step two in your assessment. This will stem from your billable rate calculations and will be an average of your projected rate hitting a specific profit percentage.
For example, using your blended rate for a 30% profit, you can compare the hours you will need to hit your sales goals, and backtrack to see how that matches up from a labor perspective and cost perspective. A great way to think about this calculation is to think of it in product terms. For example, your monthly revenue goal is your sales and your labor hours are the units. To sell a total of $120k of product, you will need 800 units to do it - or - to meet the revenue goal of $120k, you will need 800 labor hours to get there.
So what if the billable rate calculation is off or inaccurate? Well, that will skew your numbers. If you make changes to your blended billable rate, you will see how a lower number will affect the other items. Typically, if you have a lower billable rate, you will require more hours to obtain the sales goal. This is why it is so important to have access to your real time, accurate data - like your billable rates. Only with accurate information, can you make finite adjustments to better meet your goals and make solid decisions to move forward.
Billable Hours Available
How many hours do we have available to use? Heading over to our Labor Cost Tab, we see a list of our employees, their rates and the available hours they have. Considering their utilization rates, we will see an overall number of hours at our disposal each month.
Once you understand the hours you have to use, you can go back to your overview to see where you are in terms of having enough (or needing) more hours to meet your revenue goals.
In this example, we need 434 hours to meet our goal for January, but have a total of 628 hours at our disposal. We are all good, if not over-staffed for this month. But looking ahead to our business months, we see we are in a pinch and need more capacity to meet our revenue goals. So what does this mean for hiring?
In this example, it means we probably need to start hitting in late January/early February to help meet our hourly needs. Keep in mind that you will need some buffer time for new hires. They will likely take more time in the beginning stages finding their footing and getting trained, so you need to adjust your goals so you are hitting your target hours with maximum efficiency.
Revenue Per Production Labor Hour
In our recent outline of the monthly KPIs each digital agency should be reviewing, revenue per production labor was one of them. Having these numbers to compare will help us answer this question: I need to hire, but what should I be spending to hire? If you remember from our overview of this metric, we had a target of 2. To get the magic hiring number, you will need to take your sales goal number and divide it by 2.
In this example, you have about $32.5k to spend to meet your $65k goal for January. Remember, the higher the labor production hour number, the better. This means more margins are made on your labor spend. You will see below the example of a 2.5 target, and how the amounts change to show less spend on your labor dollar.
The number you get when plugging in your revenue per production labor target is your “available spend”. The next item below to consider is your “actual spend”. This comes from the numbers tracked in the Labor Costs tab. Our example below shows where the number came from:
This shows the data from your tracking of monthly spend. When you compare the actual spend to your available spend, and your labor hours against the sales targets, you will be able to assess how much more available spend exists for hiring. This is your over/under or “delta” for production labor cost. Note - these numbers look a bit different, since they are now showing a target of 2.5 versus 2 in Revenue per Production Labor.
Knowing this potential, means you can understand what you have to invest in finding new employees or contractors to meet your goals and grow. This number will also change as you adjust that goal number, as seen here when we upped it to 2.5 from 2.
How Many People Do I Need to Hire? It’s in the Goal Full Time Equivalent (FTE) Row
Our final number gets us the answer we need; how many people do I need to hire, and when? First, let’s review the stats we need to have accurately recorded, so we can ensure you are seeing the accurate calculations.
These are the items you will need to track and assess:
- Revenue/sales projections
- The billable hours required to make those sales, based upon your rates
- The billable hours available to provide (and the over/under tracking)
- The amount you have available to spend on new hires, based on your revenue per production labor dollars
The next question left to answer is in the goal full time equivalent aka, FTE. This will answer, “how many people do I need to hire to meet my goal?”
This is the average billable hours monthly for all employees. You can see this as you hover over the calculation for “Goal FTE”.
You will find this information under our Labor tab in the Digital Agency Workbook.
To get the number of employees you need, take the billable hours required, divided by the goal FTE to get your number. In our example, we need 432.4 billable hours, and will divide those by our goal FTE of 124.80.
We get 3.48.
According to these numbers, we have five people. This means we are over capacity for this month. We knew this by our overage of billable hours in red, from the lines above.
As we look across the coming months, where we have larger sales targets and will need more people, we can see how we get closer to our target number of people. The closer to our higher need months, we see that by March we need more than our current number.
Understanding this goal number will help you plan the correct timing of your hiring needs, based on the time it takes to hire and onboard. What we can ascertain from the example is this:
- We should be hiring one person by February at the latest
- We need one person again in March
- We need at least two more people, total by April
Keep in mind that at the end of the day, you need people on the bench. So to speak. This will help manage the fluctuations experienced by a service based business; from clients needing more work on short notice, to basic employee churn from someone out sick or leaving the company. You don’t want to be in a pinch, especially if a client needs more support, which will give you more revenue. Having that buffer of employees will help alleviate some of these common challenges, and by knowing your goal FTE, you can have that basic understanding of how many you should have.
When To Hire In a Nutshell
That’s a lot of calculating and assessing, so we will wrap up the overall items we have discussed in detail here. The key to understanding when and how many employees to hire all starts in the data you record and update. If you don’t have access to up to date information, start by doing that. You will need to understand and forecast sales each month, and know your actual spend on your current employees; from hours to actual payroll. By knowing what capacity you have in hours and dollars, you can start to assess if, and when you need to add more to your team to stay within a good profit range, and be ready to take on the needed client work to keep your company moving forward.
Would you rather engage the pros to help you analyze these numbers? We don't blame you, and we are happy to talk more about how we can help. Tell us about your business and we can chat through a plan for your digital agency.