Matching Hiring Decisions to Your Small Business’s Financial Data
There’s plenty of pressure when it comes to starting your own business, and that pressure compounds when you hire others and become responsible for their future. Tech Park Academy’s latest event was designed to lend a hand, with Vanessa Graham, owner of VGraham outsourced CFO services, discussing how to read and organize financial statements and how to use them to determine if the time is right to hire a new employee.
“Don’t let financial statements scare you,” Graham says. “You should have a healthy respect for the financial side of your business.”
Here are some practical tips for using financial statements to determine whether your startup is ready to add staff.
Make Your Accounting Software Work For You
There’s a lot of software available for capturing financial data, but QuickBooks is among the most commonly used for small businesses. “Many business owners don’t realize this, but QuickBooks software can be adapted to your needs,” Graham says. “This customization is an important step”, she says.
“Your financial statements should tell the true story of your business,” Graham says. “You have to make that data work for you. For example, the default settings may record transactions in a presentation or format on your P&L that does not tell the story of your business, which does not help the business owner make a decision. Customizing your general ledger accounts and the way they appear in your financial statements is an essential step in developing a framework of financial reporting that accurately reflects the activities and health of your business.”
Segregate Revenue Streams and Bucket Expenses
Your accounting software will probably lump all your income into a single revenue account, but you can split your revenue sources into multiple accounts to reflect the activities of each of your revenue streams. This way, when you look at your P&L, you can see how much revenue has been generated from the different products you sell or the services you offer. These revenue sources are the pillars of your business. It’s important to track growth for each line of revenue, so you can arrive at a better understanding of where to expand and hire.
Graham also suggests logically segregating expenses and organizing where they fall on your financial statements to give you a better understanding of your recurring, variable and fixed costs. Overhead expenses, such as rent, tend to remain consistent from month-to-month, and they aren’t optional. However, you may have more discretion over other expenses, so if you’re experiencing a cash crunch, you have the ability to cut back on things such as meals and entertainment.
Look at the Big Picture Before Making Any Decisions
Organizing your financials along these lines will give you a deeper understanding of how your business is performing. Having this knowledge will guide you in setting and achieving realistic goals for your business, Graham noted. Hiring decisions should be tied to your organization’s financial goals — and the tools you use to evaluate financial performance should be used to enhance your ability to make these hiring and staffing decisions.
The decision to hire — or not — should be determined by your margins as seen the financial presentation of your business by revenue stream or service line. You should also make a return on your previous investments (your current employees) before reinvesting. It’s an investment in your business, but you also have to be sure your revenue and margins are sustainable and are there to support new additions to your team.
You could hire a new employee when you can afford to cover the new hire’s labor and benefits costs, but a critical consideration is whether a new hire will add value to your business, Graham said. Optimizing your financial data can help you to determine where in your business a new hire would have the most impact on your financial performance and when it’s time to make your next hire.