Hiring your first employee is one of the biggest steps a small business owner can take. It can increase capacity, improve productivity, and give you more time to focus on growing the business.

But hiring someone isn’t simply a decision about whether you have enough work for them.

The more important question is whether your business can financially support the employee on an ongoing basis.

Before committing, business owners should look beyond revenue and consider profitability, cash flow, payroll costs, tax and superannuation obligations, and the additional expenses that come with employing someone.

Getting the timing right can help your business grow without creating unnecessary financial pressure.

How Do You Know When Your Business Is Ready to Hire?

There is no single revenue figure that determines when a business should hire its first employee.

A business may generate significant revenue but have limited profit and cash flow. Another business with lower revenue may have strong margins and enough recurring income to comfortably support an employee.

Instead of asking:

“Does my business make enough money to hire someone?”

consider asking:

“Can my business consistently generate enough cash and profit to cover the full cost of an employee?”

That question gives you a much better starting point.

1. Look at Your Business Revenue

Revenue is an important part of the hiring decision, but it should not be the only number you consider.

Start by looking at your revenue over several months rather than focusing on one particularly strong month.

Ask:

• Is revenue relatively consistent?
• Is revenue growing?
• How predictable are customer payments?
• Is the additional work likely to continue?
• Is the business dependent on one or two major customers?
• Are there seasonal fluctuations?

A temporary increase in sales may not justify a permanent employment commitment.

Ideally, you want evidence that the demand requiring another employee is likely to continue.

2. Understand Your Profitability

The business needs to generate enough profit to support its additional costs.

Review:

• Gross profit
• Gross profit margin
• Operating expenses
• Net profit
• Profit margin

For example, if your business generates $300,000 in revenue but only produces a small net profit after expenses, adding a full-time employee may put significant pressure on the business.

On the other hand, a business with healthy margins and consistent profitability may have greater capacity to hire.

The key is understanding what remains after existing costs have been paid.

3. Calculate the Full Cost of the Employee

One of the most common mistakes business owners make is looking only at the employee’s salary.

The actual cost of employment can be considerably higher.

Depending on the circumstances, you may need to consider:

• Base wages or salary
• Superannuation
• Payroll-related costs
• Leave entitlements
• Workers compensation insurance
• Recruitment costs
• Training
• Equipment
• Software
• Office space
• Uniforms or other work-related costs
• Other employee benefits

For example, an employee receiving a particular salary doesn’t mean that salary represents the total annual cost to the business.

Before hiring, calculate the total employment cost, not simply the advertised salary.

4. Check Your Cash Flow

Profitability tells you whether the business is generating financial value.

Cash flow tells you whether you have the money available to meet your commitments when they fall due.

This distinction becomes particularly important when hiring your first employee.

You may need to pay wages regularly even when customers are taking several weeks to pay their invoices.

Review your:

• Current bank balance
• Monthly cash inflows
• Monthly cash outflows
• Accounts receivable
• Supplier commitments
• Tax obligations
• Existing debt repayments
• Cash reserves

A business should be able to absorb the additional payroll commitment without relying on uncertain future sales.

5. Calculate Your Break-Even Point

Understanding your break-even point can help determine how much additional revenue the business needs to generate to cover the new employee.

Your break-even analysis should account for the employee’s total additional cost as well as any other expenses associated with their role.

For example, suppose hiring an employee adds $100,000 in annual costs to the business.

If the business operates with a 50% contribution margin, it may need to generate approximately $200,000 in additional sales to cover those costs.

The exact calculation will depend on the business model and cost structure, but the principle is important:

Don’t ask how much the employee costs. Ask how much additional business the employee needs to generate or enable.

6. Consider Whether the Employee Will Generate Revenue or Create Capacity

Not every employee needs to directly generate sales.

Some employees create value by freeing the business owner to focus on higher-value activities.

For example, hiring an administrator may allow an owner to spend more time:

• Selling
• Managing clients
• Developing new products
• Building partnerships
• Improving operations
• Working on strategic growth

The financial question is whether the additional capacity created by the employee is worth the cost.

7. Look at Your Owner’s Time

Sometimes the need for a first employee becomes obvious when the owner’s time becomes the business’s biggest constraint.

Ask yourself:

• What tasks am I spending most of my time on?
• Which tasks could someone else perform?
• How much revenue could I generate if I had more time?
• Am I spending too much time on administration?
• Are customers waiting because I don’t have enough capacity?
• Am I turning away profitable work?

If your time could be better spent on higher-value activities, an employee may help unlock additional growth.

However, that potential benefit should still be supported by realistic financial projections.

8. Review Your Cash Reserve

Before committing to regular payroll, consider whether the business has an appropriate cash buffer.

A business shouldn’t assume that every month will be as strong as the best month it has experienced.

A cash reserve can help absorb:

• Temporary revenue declines
• Late customer payments
• Unexpected expenses
• Seasonal downturns
• Equipment failures
• Other changes in operating conditions

The appropriate reserve will vary depending on the business and its risk profile.

9. Consider the Employee’s Expected Return

A useful way to evaluate a potential hire is to consider what the employee is expected to contribute.

That contribution may come from:

• Direct sales
• Increased production
• Greater billable capacity
• Improved customer service
• Reduced administration
• Lower operational costs
• More efficient processes
• The owner’s ability to focus on growth

The objective isn’t necessarily to expect every employee to directly generate more revenue than their salary.

Instead, consider the overall financial return the role is expected to create for the business.

10. Don’t Forget the Ongoing Commitment

Hiring someone is different from paying a one-off business expense.

Employment creates an ongoing financial commitment.

Before hiring, consider whether the business could continue supporting the role if:

• Revenue temporarily falls
• A major customer leaves
• Sales become seasonal
• Expenses increase
• The business experiences an unexpected disruption

A hiring decision should be based on sustainable financial capacity rather than the assumption that growth will always continue.

Should You Hire an Employee or Use a Contractor?

Depending on the role and circumstances, a business owner may consider engaging a contractor instead of an employee.

However, the distinction isn’t simply a matter of choosing whichever arrangement is cheaper.

Employment and contractor arrangements can have different legal, tax, superannuation and compliance considerations.

The correct classification depends on the actual working arrangement and relevant Australian requirements.

If you’re unsure whether a worker should be an employee or contractor, seek professional advice before making the arrangement.

A Simple Financial Checklist Before Hiring

Before hiring your first employee, review the following:

• Revenue: Is demand consistent enough to support the role?
• Profit: Does the business have sufficient profitability?
• Cash flow: Can the business comfortably meet regular payroll?
• Total employment cost: Have you included costs beyond salary?
• Break-even point: How much additional revenue or capacity is required?
• Cash reserves: Can the business handle a temporary downturn?
• Customer concentration: Is revenue dependent on a small number of customers?
• Future demand: Is the workload likely to continue?
• Owner capacity: Will the hire free up valuable time?
• Growth plan: Does the role support a clear business objective?

If several of these areas are uncertain, it may be worth reviewing the numbers before making the commitment.

What If You Can’t Afford a Full-Time Employee Yet?

Hiring doesn’t always have to be an all-or-nothing decision.

Depending on the business and role, alternatives may include:

• Part-time employment
• A different staffing arrangement where legally appropriate
• Outsourcing certain functions
• Investing in automation
• Improving internal processes
• Reducing low-value tasks

The right option depends on the work involved and the financial position of the business.

The important thing is to avoid creating a permanent cost before the business has the financial capacity to support it.

When Should You Speak to Your Accountant?

Your accountant can help you model the financial impact of a new employee before you commit.

This can include reviewing:

• Current profitability
• Cash flow
• Business forecasts
• Break-even point
• Employment costs
• Tax and superannuation obligations
• Expected revenue growth
• Business structure

A simple financial forecast can help answer a much more useful question than “Can I afford the salary?”

It can show whether the business can afford the full cost of the role over time.

Frequently Asked Questions About Hiring Your First Employee

How much revenue does a business need before hiring an employee?

There is no universal revenue threshold. Hiring capacity depends on profitability, cash flow, operating costs, the employee’s total cost, and the stability of the business’s revenue.

How do I know if my business can afford an employee?

Calculate the employee’s total employment cost and compare it with your projected profit and cash flow. You should also consider whether the business has sufficient reserves to handle weaker periods or unexpected expenses.

Should I wait until I have enough work for a full-time employee?

Not necessarily. If an employee can free the owner’s time for higher-value activities or support sustainable growth, hiring earlier may make sense. The financial return and ongoing affordability should be considered carefully.

What costs should I include when calculating the cost of an employee?

Consider salary or wages, superannuation, leave-related costs, insurance, recruitment, training, equipment, software and other costs associated with the role.

Is hiring an employee better than using a contractor?

It depends on the role and circumstances. Employees and contractors have different legal and tax considerations, and a worker’s classification should reflect the actual working arrangement rather than simply the preferred payment method.

Should I speak to an accountant before hiring my first employee?

Yes. An accountant can help you assess the financial impact of the hire, model cash flow and profitability, and identify tax, superannuation and other financial considerations before you commit to the ongoing cost.

Talk to Latitude Accountants Before Your Next Hire

Hiring your first employee can be an important milestone for a growing business, but it should be supported by sound financial planning.

Latitude Accountants helps Australian business owners understand their numbers, plan for growth and make informed decisions through accounting, budgeting, forecasting, tax planning and business advisory services.

If you’re considering hiring your first employee and want to understand whether your business is financially ready, our team can help you assess the numbers before committing.

Latitude Accountants

📍 Sydney Olympic Park | Marrickville | Melbourne | Loxton
📞 1300 706 597
📧 info@latitudeaccountants.com.au

Want tailored business advice? Let’s chat.

Disclaimer

This article provides general information only and does not constitute financial, tax, accounting, employment or legal advice. Employment costs, obligations and worker classifications can vary depending on individual circumstances and applicable Australian laws. You should seek advice from appropriately qualified professionals before hiring an employee or engaging a contractor.