A 30,000 salary can cost 42,000 and require 105,000 of sales. How to work it out before you hire.
Key findings
- With 30% employer costs and 3,000 of other costs, a 30,000 salary costs 42,000 a year.
- With a 40% contribution margin, you need 105,000 more in sales a year to pay for it.
- With a 60% margin, 70,000 would do: the lower the margin, the more you have to sell.
An employee costs more than their salary
On top of the gross salary comes what the business pays to employ someone: employer social contributions or payroll taxes, plus other costs such as equipment, training, software or space. Contribution rates depend on the country and the type of contract, so this article uses illustrative figures.
An example with numbers
A hypothetical gross salary of 30,000 a year, with 30% employer costs (9,000) and 3,000 of other costs, costs the business 42,000 a year: 3,500 a month.
How much you need to sell to pay for it
That is the question that really matters. To pay 42,000 it is not enough to sell 42,000: every sale has its variable costs (materials, fees, shipping…). What is left to cover fixed costs is the contribution margin.
With a 40% contribution margin, every 100 of sales leaves 40. To cover 42,000 you need 105,000 more in sales a year, about 8,750 a month. With an average price of 150, that is 700 more orders a year, 59 a month.
With a 60% margin, 70,000 a year would be enough: 5,833 a month, or 39 orders. The lower your margin, the more you have to sell to pay the same person.
Before you hire
- Ask whether that person will generate those sales or free up time for you to generate them. If not, the hire is paid out of profit you already had.
- Allow for a ramp-up period. In the first months people usually produce less while they learn, and the cost runs from day one. Keep enough cash for that period.
- Check the employer costs in your country and any applicable agreements: they change the total a lot.
- Compare alternatives: part-time, a freelancer or an outside firm for specific tasks.
Work out your case with the cost of hiring calculator and check your break-even point with the break-even calculator.