Insights
Can your agency afford to hire? Work it out before you post the job
Your agency can afford a hire when two numbers work. One is the monthly fees the new person must bring in. The other is the cash you need before those fees arrive. Divide the hire's full monthly cost by one minus your margin, then map the months until clients pay.
Mohammad Azam, Aprecity Consultants · 5 min read
Why the salary is the wrong number to check
Your team is stretched, and a new client is close to signing. You look at the salary, look at the bank balance, and decide it fits.
The salary is only part of what the hire costs you. And the fees their work earns arrive months after their first payday.
Hire on the salary alone and you find out in month three or four. That is when the bank balance is lowest and the decision is hardest to undo.
The two numbers that answer it
Fees needed each month = monthly cost of the hire / (1 - your margin)
Monthly cost means salary, payroll taxes, benefits, equipment and software, divided by twelve. Your margin is the one you price your work at.
The second number is the cash you need before the fees catch up. It is the lowest point of a running total of cost against fees collected.
One hire, month by month
Run the numbers on an invented designer who costs $90,000 a year in full, or $7,500 a month. The agency prices at a 40% margin.
The designer must bring in $12,500 of fees a month. They bill half that in their first two months, then full time. Clients pay two months after the work.
| Month | Cost | Fees collected | Running total |
|---|---|---|---|
| 1 | $7,500 | $0 | -$7,500 |
| 2 | $7,500 | $0 | -$15,000 |
| 3 | $7,500 | $6,250 | -$16,250 |
| 4 | $7,500 | $6,250 | -$17,500 |
| 5 | $7,500 | $12,500 | -$12,500 |
| 6 | $7,500 | $12,500 | -$7,500 |
| 7 | $7,500 | $12,500 | -$2,500 |
| 8 | $7,500 | $12,500 | $2,500 |
These figures describe an invented hire chosen to show the arithmetic. They are not a client result.
This hire pays off, but only in month eight. Before that, the agency needs $17,500 of spare cash, on top of everything it already runs on.
Run it before you post the job
- ( 01 )
Total the hire's full cost
Add salary, payroll taxes, benefits, equipment and software for a year. Divide by twelve.
- ( 02 )
Work out the fees they must bring
Divide the monthly cost by one minus your margin. Check that the work exists to fill those fees.
- ( 03 )
Map the ramp honestly
Few people bill fully in their first month. Write down what they will bill in each of the first six months.
- ( 04 )
Add your payment delay
Shift each month's fees by the time your clients take to pay. Keep a running total of cost against cash in.
- ( 05 )
Compare the low point with your spare cash
Take the deepest negative number. If your bank balance, after payroll and bills, cannot cover it, the hire has to wait or the work has to be signed first.
What to do with the answer
If the fees exist and the cash covers the low point, hire with confidence. You know the month it pays back, so you can watch for it.
If the fees are not there yet, sign the work first or use a freelancer until they are. If the cash is short, billing earlier shrinks the low point.
The number that proves it is the running total. When it turns positive on schedule, the hire has paid for itself.