Increasing staffing is almost always the first type of expansion a new business will undertake. As customer traffic increases, more and more labor is required to keep the business running smoothly. However, before you increase your payroll, you should first make sure that you need to hire additional staff and that you can afford the actual costs. This is the first blog in a three-part “How To Know When To Expand” series, with the two blogs following covering adding new product lines and opening another store.
When To Adjust Labor
The first step in deciding whether to increase staffing is to determine whether a staffing increase is needed. A rule of thumb that has worked well for our business is what we call the 75/85 rule, which calls for employees to be productively engaged for between 75-85% of their shift when determining adequate staffing levels. If employees in a store or area are consistently busy 85% or more of the time, we consider it to be understaffed. This would mean that in an average 8-hour shift, employees cannot accomplish all of their assigned tasks (including taking care of customers, sorting new intake, daily cleaning tasks, etc.) without at least an hour of “down-time” throughout the shift. Conversely, if they have 75% or less active time (less than 6 hours of an 8-hour shift), we consider the area overstaffed.
We have found that doing this has multiple advantages. By not constantly pushing employees to operate at maximum capacity, we have seen significantly reduced call-outs and missed shifts. The 75/85 rule provides an excellent middle ground between productivity and preventing employee burnout, which helps with employee retention.
Having your employees with some “unused productivity” also gives your business room to handle things like busier-than-normal days and special projects - like the annual reorganizing of the back room.
If your existing employees (or just yourself, if you have no employees yet) are routinely working above 85% of their capacity, then it may be time to look into expanding your labor force.
Alternatives To Hiring New Employees
If you have determined that a labor expansion is needed, consider whether you have any other options before hiring additional employees.
Look at your employees’ average work routine. Are there areas that are requiring more work than is necessary? Sometimes changing workflows or reorganizing things can reduce the workload on employees enough that you don’t need to hire additional staff. For example, if your online shipping team is overworked, consider reorganizing their work area or changing their process to bring them back under capacity.
Do you have employees in another store or area that are working under capacity? If so, consider reallocating some employee hours (maybe having an employee that splits time between two stores or works a couple of hours on online shipping as well as in-store). Doing this can ensure that you make the most effective use of your existing labor pool before expanding it.
Lastly, before hiring a new employee, check with your existing part-time employees to see if any of them want to work additional hours. Some payroll costs (like time clock software and payroll software) are often at least partially based on the number of employees on your payroll. By expanding hours for part-time employees, you can save some money on these costs compared to hiring additional staff.
Consider True Hiring Costs
When considering adding additional staff, keep in mind that payroll is often as much as 70% of a small business’s operating costs, and payroll costs are more than just wages. Hiring your first employee is a huge milestone for your company, but the extra costs can often catch small business owners by surprise.
Here are examples of some of the additional costs you may encounter beyond the basic hourly wage of new employees:
- Employer share of Social Security, Medicare, etc. taxes. As of 2021, this is 7.65% of your payroll costs.
- Federal unemployment protection tax. As of 2021, this is 6% of the first $7,000 paid to each employee per year.
- State payroll taxes - varies by state.
- Payroll processing software - depending on your business needs, this can cost anywhere from a few hundred dollars up to several thousand dollars per year.
Before you consider expanding your staffing, make sure you can afford the total costs, not just the new hire’s hourly wage.
Expanding staffing is a vital part of growing your business. However, ensure that you do not do so too quickly, to prevent getting overwhelmed by surprise extra costs. Develop a workable metric to determine when you are understaffed, and also look for any understaffing situations that would allow you to reallocate resources without hiring more staff. Lastly, take some time to understand all of the extra costs associated with a new hire to guarantee you will be able to remain within your budget. Keep on the lookout for our next blog in the series, which will focus on adding new product lines as a method of expansion.