Thinking of hiring, but not sure when? Should you hire immediately or postpone until a better time? Consider the opportunity cost of not hiring.
Two hypothetical scenarios
- Carl’s Courier:
Carl owns a courier company with 12 employees. They specialize in same day local delivery with guaranteed 2 hour time. However, one pocket of the area he services is underrepresented and he wants to increase his presence in that area. Hiring an extra truck driver along with some overflow by dispatch should cover this territory. He anticipates sales will increase by about $8,000 per month and perhaps double within 2 years. However, his increased labour costs for the driver, truck lease and dispatch will cost $7,000 per month. Alternatively, by paying overtime for 2 existing drivers and having other drivers rotate dispatch to handle the overflow he can achieve the same result with only $3,500 per month in increased cost. Reallocating existing resources allowed him to increase sales without hiring a new full time employee.
THE LOST OPPORTUNITY COST OF NOT HIRING IS ZERO.
- Sheila’s Software:
Sheila owns a software company with 9 employees. They specialize in building travel software to help travel agents book group tours. Currently, they do about $1 million per year in annual revenue, but by converting their legacy system to a newer more user friendly system, they will increase their customers productivity and add a new module for group rail travel. They anticipate a 50% increase in sales or $500,000 per year within the first or second year. This means hiring a software developer skilled in both FoxPro and .Net to make the conversion and build the additional module. It will take 12 months and cost $90,000 in labour, $20,000 in recruiting costs for locating this “hard to find” specialized skill plus another $10,000 in marketing collateral and $20,000 in end user training. Generating an additional $360,000 in revenue can be achieved by investing $140,000.
THE LOST OPPORTUNITY COST OF NOT HIRING IS $360,000 or $30,000 PER MONTH.
The lost opportunity cost of not hiring can be calculated as follows:
- Increased revenue: $
- Increased customer satisfaction: $
- Increased internal productivity: $
- Reduced internal absenteeism and turnover: $
Less the costs associated with the new hire (labour, recruiting & operations): $
Equals net lost opportunity cost of not hiring: $