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We here at Hughes & Co believe that employment costs deserve much closer attention than simply looking at the salary paid to each employee. For Irish SMEs, the true cost of employment can include employer PRSI, pension contributions, benefits, recruitment, training, leave and other employment-related expenses. As these costs increase, businesses need to understand how they affect margins, pricing, cash flow and future growth.

The real cost of employing someone

When an SME is considering hiring, it is common to start with the proposed salary. A €40,000 salary, for example, may appear manageable when compared with expected additional revenue. The difficulty is that the salary is only one part of the overall employment cost.

Employer PRSI, pension obligations, benefits, recruitment costs, training, equipment and other employment expenses can all increase the amount a business needs to generate from an employee before that person becomes financially worthwhile.

There can also be less visible costs. A new employee may require management time, additional software, workspace, insurance, equipment and administrative support. During their first months, productivity may also be lower while they learn the business and their role.

For an SME operating with relatively tight margins, these additional costs can have a meaningful impact on profitability.

Rising employment costs can affect margins quickly

A business does not necessarily need to make a loss for employment costs to become a problem.

Suppose an SME generates €1 million in annual revenue and has a 15% operating profit margin. That produces €150,000 in operating profit.

If employment costs increase by €30,000 without a corresponding increase in revenue, the operating profit falls to €120,000. The business is still profitable, but its margin has fallen from 15% to 12%.

That change can become significant when repeated across several employees.

This is why business owners should look at employment costs as a percentage of revenue and gross profit, rather than considering individual salaries in isolation.

Higher costs can expose weak pricing

One of the biggest questions for an SME facing rising employment costs is whether its current pricing remains sustainable.

If labour represents a significant proportion of the cost of delivering a product or service, increases in employment costs can quickly reduce gross margins.

This is particularly relevant for businesses that have allowed prices to remain unchanged for several years. A price that was profitable when wages and other employment costs were lower may no longer provide the same return.

Businesses should regularly review:

• Revenue generated per employee

• Gross profit per employee

• Labour cost as a percentage of revenue

• Labour cost as a percentage of gross profit

• Billable or productive hours

• Average revenue per working hour

• Overtime and additional staffing costs

These figures can provide a much clearer picture of whether the business is generating sufficient value from its workforce.

Productivity becomes increasingly important

Higher employment costs make productivity more important.

This does not necessarily mean asking employees to work longer hours. It means examining whether employees have the systems, processes, training and resources needed to perform effectively.

An employee spending several hours each week dealing with inefficient administration represents a real cost to the business.

For example, if five employees each lose two hours a week because of inefficient processes, that could represent hundreds of hours of lost productive capacity over a year.

Technology, automation and better processes may therefore have a financial value that is easy to overlook.

Before hiring additional staff, an SME should consider whether existing employees could become more productive through better systems or clearer processes.

Hiring should be based on financial capacity

Growth can create pressure to hire.

More customers may mean more work, and additional employees can be the right solution. The financial question is whether the business can comfortably absorb the cost before the expected return arrives.

A useful exercise is to calculate the break-even point for a proposed hire.

Consider the total annual cost of the employee, including salary and associated employment costs. Then estimate how much additional gross profit the employee needs to generate to cover that cost.

This provides a more realistic measure than asking whether the employee will generate enough revenue.

A salesperson generating €100,000 of additional sales may sound attractive, for example, but the business needs to consider the gross margin generated by those sales.

Revenue alone does not pay wages. Gross profit and cash flow do.

Cash flow matters as much as profitability

Employment costs are also different from many other business expenses because they are recurring commitments.

A business may be able to delay certain discretionary expenditure during a difficult period. Payroll obligations still need to be met.

This makes workforce planning particularly important for businesses with seasonal revenue.

An SME should consider whether it has sufficient working capital to maintain payroll during quieter periods. A profitable business can still experience financial pressure if cash inflows do not arrive at the same time as employment costs.

Regular cash flow forecasting can help identify potential pressure before it becomes a problem.

Consider the wider return on employment

Employment costs should not be viewed solely as an expense.

The right employee can increase sales, improve customer service, reduce errors, strengthen management capacity or allow an owner to focus on higher-value activities.

The important question is whether the overall financial return justifies the investment.

This means reviewing the performance of existing roles as well as proposed new hires. Some positions may generate revenue directly, while others provide essential operational support. Both can be valuable, but the business should understand how each contributes to its overall performance.

Review your employment costs before margins come under pressure

Irish SMEs cannot control every change affecting the cost of employment, but they can control how they respond.

Regular financial reviews can help business owners identify whether employment costs are increasing faster than revenue, whether pricing needs to change, whether productivity can improve and whether planned recruitment remains affordable.

The key is to act before rising costs have materially weakened profitability.

Employment decisions are among the most important financial decisions an SME makes. Looking beyond the headline salary and understanding the full cost of employment can help business owners make better decisions about recruitment, pricing, productivity and growth.

If you would like to discuss your business, contact us by email info@hughesandco.ie or visit hughesandco.ie.

Disclaimer

This article is based on publicly available information and is intended for general guidance only. While every effort has been made to ensure accuracy at the time of publication, details may change and errors may occur. This content does not constitute financial, legal or professional advice. Readers should seek appropriate professional guidance before making decisions. Neither the publisher nor the authors accept liability for any loss arising from reliance on this material.