How do I know if I can afford to hire an employee?

Work out the full yearly cost of the role (pay, plus on-costs, plus equipment, software and training), divide it by 12, and compare it with your average monthly net profit over the last year. Then divide the monthly cost by your gross margin to see the extra sales the hire has to bring in for profit to stay where it is. A $72,000 role costs $6,000 a month and, at a 40% gross margin, needs $15,000 of extra sales a month.

How much does an employee cost on top of their wage?

More than the pay. In Australia there is super, in New Zealand employer KiwiSaver contributions and ACC levies, and in the UK employer National Insurance and pension contributions; payroll tax or workers' compensation can apply too. Then add equipment, a vehicle or tools, software seats, training and recruiting. Rates change, so check the current ones with your tax authority or accountant and enter them as a percentage.

Why divide by gross margin to get the sales needed?

Because each extra sale only brings in its gross profit, not the whole amount. At a 40% gross margin, $1 of sales leaves 40 cents after the cost of the goods or materials, so covering $6,000 of extra cost a month takes $6,000 ÷ 0.40 = $15,000 of extra sales. A business that sells only its time, with no cost of sales, can use 100%.

What if the person will not bring in sales directly, like an admin role?

Then the cost comes out of today's profit, unless the hours it frees up turn into sales. The calculator shows profit after the hire with no extra sales, which is the honest worst case. If the role frees you to quote or sell for ten more hours a week, ask what those hours have brought in before.

How long does a new employee take to pay for themselves?

It depends on the role. Someone doing billable work you already have waiting may cover their cost in the first month; a salesperson or a role building new work often takes three to six months. Enter the months you expect and the calculator shows the cash needed to carry them until then.

Where do I find these figures in Xero?

Run the Profit and Loss for the last 12 months. Net profit divided by 12 is your average monthly profit. Gross profit divided by Total Trading Income is your gross margin. Cash is the total of your bank accounts on the Balance Sheet or the dashboard.

Are my figures stored or sent anywhere?

No. The calculation runs in your browser. Nothing you type is saved or sent to our server or anyone else. The only exception is if you ask us to email you the result: then your email address and a short summary of the result are stored, and nothing is sent until you confirm.

Can I afford to hire someone? Free hiring cost calculator

How the calculator works

Full yearly cost = pay + on-costs (pay × on-cost %) + other yearly costs. Divided by 12, that is the cost a month.
Extra sales a month = monthly cost ÷ gross margin. Each extra sale only brings in its gross profit, so this is the sales the hire has to add for profit to stay where it is.
Profit a month after = today's average monthly net profit − monthly cost, before any extra sales. It is the worst case if the new person's work brings in nothing new.
Cash to carry them = monthly cost × the months before their work covers their cost, against the cash in the bank.

A worked example

A landscaping business in Australia wants a second crew member. Made-up figures to show the arithmetic.

The role, per year	$
Pay	60,000
Super at 12%	7,200
Tools, uniform, phone, training	4,800
Full cost	72,000

Cost a month: $72,000 ÷ 12 = $6,000.
Extra sales needed: the business keeps 40% of sales as gross profit, so $6,000 ÷ 0.40 = $15,000 more sales a month, or $180,000 a year. That is about three extra $5,000 garden jobs a month.
Profit with no extra sales: the last 12 months made $108,000 of net profit, $9,000 a month. With the hire and no new work, it would be $9,000 − $6,000 = $3,000 a month. Still a profit, so the hire is affordable even before it brings anything in.
Cash to carry them: if it takes 3 months to win the extra work, that is up to 3 × $6,000 = $18,000, leaving $12,000 of the $30,000 in the bank.

If the same business made only $4,000 a month, the hire would turn it into a $2,000 monthly loss until the extra work arrived; with $10,000 in the bank, three months of ramp-up would run the account into overdraft. Same role, different answer. Press "Load the worked example" above to see it in the calculator.

Getting the figures from Xero

Go to Accounting › Reports › Profit and Loss and run it for the last 12 months. One good month makes a hire look easier than it is.
Net profit a month: the Net Profit line ÷ 12. If you do not pay yourself a wage, take off what you need to live on first; how much can I pay myself explains why.
Gross margin: Gross Profit ÷ Total Trading Income × 100. Gross profit margin in Xero covers what moves it.
Cash: the total of your business bank accounts on the Balance Sheet, less any tax you already owe. How many months of cash should a business have helps set a floor you do not hire below.
On-costs: if you already run payroll in Xero, the Payroll Activity Summary shows gross wages next to super (or employer NI and pension) for the same period; the second ÷ the first × 100 is your on-cost %. Xero payroll reports explains which report to run and what a wage really costs.

Before you sign the contract

Check the extra sales are realistic. Do you have work waiting, quotes you turn down or hours you cannot bill? The break-even calculator shows your new monthly floor with the hire in your overheads, and a profit and loss forecast shows what the hire does to the whole year while the new person builds up work.
If the hire comes with new work, weigh the whole deal. A contract that needs an extra person also brings materials, running costs and sometimes equipment or slower-paying customers. Count only the cash that changes because you say yes; incremental cash flow works through a bakery whose wholesale contract needs a £18,000 part-time baker and a new oven and still adds £15,400 a year.
If you bill their hours, price them. Put their wage in as the pay, your on-cost % as the super or pension, and the share of their hours customers will really pay for: the charge-out rate calculator shows the hourly rate that covers them and leaves a margin.
Know your runway. The cash runway calculator shows how long the bank balance lasts at the higher monthly cost if sales do not grow.
Watch the wage share afterwards. The wage percentage calculator shows wages as a share of sales and gross profit once the new person is on the payroll.
Mind profit that is not cash. If customers pay slowly, a profitable month can still leave too little in the bank to pay wages; see profit but no cash.

Questions

How do I know if I can afford to hire an employee?: Work out the full yearly cost of the role (pay, plus on-costs, plus equipment, software and training), divide it by 12, and compare it with your average monthly net profit over the last year. Then divide the monthly cost by your gross margin to see the extra sales the hire has to bring in for profit to stay where it is. A $72,000 role costs $6,000 a month and, at a 40% gross margin, needs $15,000 of extra sales a month.
How much does an employee cost on top of their wage?: More than the pay. In Australia there is super, in New Zealand employer KiwiSaver contributions and ACC levies, and in the UK employer National Insurance and pension contributions; payroll tax or workers' compensation can apply too. Then add equipment, a vehicle or tools, software seats, training and recruiting. Rates change, so check the current ones with your tax authority or accountant and enter them as a percentage.
Why divide by gross margin to get the sales needed?: Because each extra sale only brings in its gross profit, not the whole amount. At a 40% gross margin, $1 of sales leaves 40 cents after the cost of the goods or materials, so covering $6,000 of extra cost a month takes $6,000 ÷ 0.40 = $15,000 of extra sales. A business that sells only its time, with no cost of sales, can use 100%.
What if the person will not bring in sales directly, like an admin role?: Then the cost comes out of today's profit, unless the hours it frees up turn into sales. The calculator shows profit after the hire with no extra sales, which is the honest worst case. If the role frees you to quote or sell for ten more hours a week, ask what those hours have brought in before.
How long does a new employee take to pay for themselves?: It depends on the role. Someone doing billable work you already have waiting may cover their cost in the first month; a salesperson or a role building new work often takes three to six months. Enter the months you expect and the calculator shows the cash needed to carry them until then.
Where do I find these figures in Xero?: Run the Profit and Loss for the last 12 months. Net profit divided by 12 is your average monthly profit. Gross profit divided by Total Trading Income is your gross margin. Cash is the total of your bank accounts on the Balance Sheet or the dashboard.
Are my figures stored or sent anywhere?: No. The calculation runs in your browser. Nothing you type is saved or sent to our server or anyone else. The only exception is if you ask us to email you the result: then your email address and a short summary of the result are stored, and nothing is sent until you confirm.

This calculator gives an estimate from the figures you enter. It is not financial or employment advice. Xero is a trademark of Xero Limited. This tool and ReportPilot are independent and are not made or endorsed by Xero.

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