How Much Should I Spend On Team?
Every business operation boils down to one thing: cash. Without it, the business goes under.
Budget planning and allocation are vital tasks in every business activity. No project, production, or strategy is complete without a reasonable budget backing it up. No matter the nature of your business, monetary resources play a massive role in its growth and success. However, most small businesses don’t look at forecasts or budgets and hardly any have a Profit Plan in place.
In corporate environments, businesses are able to predict their profit incredibly accurately, and in fact, when they get it wrong (actuals versus budget) the stock market reacts very negatively because the market believes (rightly so) that every business should be able to predict their profit.
This is the same for small businesses - every business can predict their profit incredibly accurately when they have a Profit Plan in place.
With a Profit Plan, not only are you able to predict profit, you are able to work out how much you should spend on different areas in your business, including how much you should spend on the team.
Rule of Thumb
The goal for team members is that they have a 4x impact on the business. What that means is that they are contributing at least 4x more to the finances of the business than they are costing you in salary/invoicing.
Essentially that translates to the team costs of your business being no more than 25% of revenue. This can be a challenging number to reach, especially with a growing team, as, at each point, you'll have someone new coming on board who is not yet at their 25% performance level, but this should be the target and one you are striving to reach as you built out your Profit Plan.
I should also be really clear at this point, what I mean by team:
Whenever I say team I mean any person that is working with your business - they could be an employee, contractor, freelancer, subcontractor - their legal status does not matter. If they are a person working with your business then they are in your team.
Some of your team will have the ability to impact revenue directly, or their role can be adjusted so that is the case.
Others will not be able to affect revenue but they will be able to impact profit (for example, your accountant should fall into this category!)
We want to assess every single team member to find their financial impact on your business, and for some it might be hard to allocate a specific financial number to, you will have to dig into their actions and to do's and see where that leads in terms of their impact on the business. For others, for example, salespeople, it will be very simple.
If you have a team at the moment that does not have (at least) an impact on the bottom line (profitability), then what can you do to morph their role into one where they are capable of impacting the bottom line, and ideally the revenue too (top line)?