Growth Eats Cash

Happy Friday,

Since we were talking about cash flow, here's something you should know that most don't.

Hiring people rapidly depletes a company's cash. Even when the hired person starts billing their time right away, the business still digs a big hole in its cash before the first recovery dollar arrives.

Here’s an example. 

You advertised, found, and hired just the right person, and today is their first day. Their first two weeks will be spent signing papers, meeting people, being trained, learning software, and getting familiar with the projects. Once up to speed, they'll be fully billable. Hooray! You're paying a salary of $10k/month, and your overhead and benefits (40% of wages) amount to $4k/month. So, how big is this hiring hole going to get? 

Let's add it up - two introductory weeks, one month of billable work, two weeks to prepare and send the first invoices, and 60 days waiting for the client to pay. You started paying your employee on day one, and the first dollar for their first hours of billable time finally arrived four months later. So it's a $56,000 hit to your available cash. If they remain highly billable, you'll gradually claw back to even over the year ahead.

That's the cash impact for just one highly billable employee. If a firm's average employee turnover rate is, say, 15%, imagine the relentless drain on cash flow to replace 15% of its staff every year. And that's just to stay even! Better yet, do the math for your company. You'll be astounded. Luckily, the cost of employee turnover doesn't appear as a separate expense on financial statements, or someone would be in trouble.

People usually think hiring billable staff is a no-brainer. But all hiring requires coming up with a ton of cash. Turnover drains cash, and growth drains cash.

Punch line: Entrepreneurial leaders weigh two financial questions when hiring: how deep will the hole get (can we afford it), and how soon will it be filled back in?

That's it. Have a great weekend!

Dave

Feedback and blowback are always welcome: dave@goodnewsfriday.com

All past topics are still available at @goodnewsfriday.com

Written by me, not ChatGPT, with valuable speed assist and grammatical enhancements graciously provided by Grammarly.