Dynamic Happenings

Expanding Your Workforce? Calculate & Analyze the Risk!

A recent newsletter article here addressed why expanding your workforce
in response to the growing economy could be very beneficial to your business. 
If you read the article, you, of course, have been actively growing your necessary
staff to capture the opportunity. 

What, You’re Suspicious of the Pundits’ Advice?

Perhaps you have concerns about the validity and rate of economic growth for the near future. As a cautious business owner, you’d rather wait for consistent increases in the economy before taking the plunge and staffing-up instead of risking increased costs on anticipated growth?  Well, that is an understandable business decision… and one that may play right into your competitors’ hands.

Avoiding unnecessary risk is important in any business, and following the projections of business pundits has certainly been risky from time to time.  But inaction can also have its risk in allowing your competitors to gain valuable market shares by gobbling new business you’re not ready to handle.
 
So what can you do?  Managing risks is key to a successful business and that can only be done when you understand the effects of change on your business.

If You Don’t Trust the Pundits, at Least Trust The Numbers!

If you look at numbers your business provides on an ongoing basis you will learn that the potential rewards of increased business normally far exceed the downside risks.  Let’s look at a hypothetical business and see how the numbers change. 

For ease of calculation, our business’ normal sales will be $100K/mo, with 60% variable COGS, $30K fixed expenses and a resulting 10%, or $10K, profit. Now, let’s consider a relatively modest 5% increase in sales.

Note that a 5% ($5K) increase in sales yields a 20% ($2K) increase in profit, so, because fixed costs don’t change with sales increases, there is a definite upside to seeking new revenues.

But, What About the Potential Risk?
There are several ways to consider downside risks.  In our example, if staff is added (and COGS increased), and no sales increases are realized, the Net Profit would go down by 30% ($3K) but still be profitable. 

Many business owners are willing to risk the reduced profits but are concerned about changes to the potential for real losses, or, stated in other terms, the change to the “Breakeven Sales Point”).  In our examples, using the formula:

This translates into approximately an 8% increase in risk of losing money by incurring higher labor costs in our example, compared to the 20% increase in profits if the increased sales are realized.

It’s Your Choice

If you unwilling to risk any profits to realize increased profit potential in an expanding market then you should take the conservative route and leave your staff at current levels. Let your competitors take the risk.  On the contrary, if you are willing to take the calculated risk of labor expansion, the (probably ongoing) rewards seem to greatly exceed the potential risk.

How To Have Your Cake And Eat It Too

The driving factor in our examples is the cost of labor, a cost assumed to be variable, that expands or contracts (as a set percentage) with sales.  In reality, labor costs are not truly variable because business owners don’t typically lay off workers based on small changes in sales levels, hence the increased risk in our “downside” examples.  Good workers are hard to find, and usually hard to get back after being laid off.  So, is there any way to minimize this factor?

Dynamic provides perhaps the best of both worlds.  By offering a skilled labor force that is, by nature, very flexible in hours, a company can find readily available labor to tackle the increased business without the increased risk of hiring new full-time employees.  And the added bonus is that if business increases are ongoing, you have known candidates to consider adding on a full-time basis.

Oh, and if you don’t get the type of business management numbers used here from your business accounting, we have people who can help with that too.