How can management accounts help you make the right recruitment decisions?

Everyday, small business owners are faced with decisions that will shape their company and impact on future growth. The more information a business owner has at their disposal, the better their decisions can be. Managerial accounting is one process that can provide valuable insights to aid decision-making in some surprising areas of the business.

One important decision small business owners must make concerns the recruitment of staff. Taking on new employees at the right time is central to business growth. The costs of recruitment are considerable, so it’s essential you use all the information available to determine when staff should be taken on, and in what areas.

While you might not immediately see the link between management accounts and the recruitment process, here are five ways management accounts can improve your hiring decisions…

1. Forecast the impact of new recruits

The cost-volume-profit analysis, which is commonly included in management accounts, gives small businesses insight into how differing levels of activity impact their financial results. Based on the figures, you will be able to forecast the impact of employing a new salesperson on the company’s costs, sales volume and profitability before hiring decisions are made.

2. Identify the skills you need

Performing an analysis of your sales by product and service area will allow you to see where new employees could be best used to grow your company. If a particular product or service is performing well, new resources targeted specifically at this area could help to increase sales and ultimately boost the profitability of your business.

3. Understand the impact on profit

Analysing the profitability of each of your product and service areas as part of your management accounts will help you allocate new recruits to maximise profitability. Assume a new sales person is to be appointed with the aim of selling £10,000 worth of product or service A. The profit margin on each unit is 20 percent, so the profit generated will be £2,000. Product or service B has a profit margin of 40 percent per unit, generating a profit of £4,000 for every £10,000 sold. This insight allows you to determine the skills you need and the most profitable area for the new recruit to work in.

4. Consider the effect on cash-flow

Recruiting a new employee is an expensive process. Not only will there be an increase to your monthly wage bill to consider, but there will also be a number of costs beyond the headline salary. Training, recruitment agency fees, new computer equipment and increases to your tax bill all need to be considered. These costs will all have implications for your cash-flow, which is why it’s so important to produce management accounts.

5. Calculate the ‘opportunity cost’

Having a firm grasp of your management accounts allows you to weigh-up the opportunity cost of recruitment against other possible areas of investment. It could be that your money would be better spent investing in new machinery rather than taking on a new recruit. Calculating the cost of opportunities you might miss by recruiting can help you make the right decision for your small business.


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