Using Financials to Make Smart Staffing Decisions for Coaching Businesses (with Emily Sandberg)

Employees: a special kind of expense for coaching businesses

Employees are a special expense because of laws regarding hiring and firing. Emotional decisions surround employees, making them different from other expenses that can be canceled or have a fixed cost. The cost of wages only goes up, and training is expensive and time-consuming. 

Competition for higher-level positions can lead to a bidding war over compensation. There's no customer service for employees, so it's essential to engage in leadership training to manage them effectively. Being aware of these potential pitfalls will help in making good hiring decisions and using a hiring software more effectively.

Why do coaching businesses hire? 

Employees are hired for their unique skills and the human element they bring to the business. They are a valuable investment due to their compassion, drive, and passion.

However, managing them requires careful attention and is a significant investment. To increase our return on investment in our people, it's essential to manage them effectively.

Using your financials as a coaching business

When looking into financials, there are few important thing to consider: 

• Are you profitable? The bottom line is crucial because it represents the profit or loss of your business. While the top line revenue may be interesting to look at, focusing on profitability is essential. Knowing whether you're profitable is necessary for your business.

What is the percentage of your profitability? For coaching or course creator businesses, a recommended profitability range is 20% to 60%, with a minimum viable level of 10%.

Having a life coach to talk about money with can be helpful. It's crucial not to beat oneself up with the numbers but use them as data and possibilities. A coaching business can achieve a 20% to 60% profit margin.

• How much of your expenses goes to a staffing? You should be able to figure out your staffing costs, or talk to your bookkeeper for help. Contractors and other employees should fall within the range of 25% to 40% of your expenses to ensure safety. 

Remember to include costs associated with headcount, such as software, hardware, benefits, and team events. For example, adding a user to ClickUp costs around a hundred dollars per year, and furnishing an office for an employee is also a cost. 

Once you have accounted for all these expenses, you'll have a better idea of your true headcount costs.

What does your coaching business need to deliver its product 

Tasks such as marketing, technology management, coaching, communication, and video production are essential for delivering your business's product. These tasks are assigned to roles, not individuals. It's important to think of your staffing in terms of roles, such as head coach, virtual assistant, marketing specialist, etc.

This helps remove emotions from the hiring process and enables us to quantify the value of a role rather than an individual. Overpaying employees can create confusion, so it's essential to pay for results in a role, not just for an individual's presence in the business.

Profit and loss statement - P&L

This is a simple P&L example with a focus on staffing expenses. The business had a great year with $3.3 million in revenue and a 5% cost of sales. Payroll includes the CEO, head of operations, sales and marketing salaries, director of coaching, and customer service, as well as payments to an ad agency contractor. The total payroll, including contractors, is $890,000 or 27% of revenue. Other expenses include employer payroll taxes, benefits, software expenses, education and training, travel, and miscellaneous costs. The business has 60% expenses and a 43% profit margin, with taxes estimated at 15% of total revenue and 35% of profit.

Taxes are at 35% and 32% of profit goes into a reserve, which is $450,000 this year. Total payroll is $75,000 per month and is a number to consider when thinking about reserves. Total expenses are $157,000 per month, which equals almost $1.9 million per year. This means there is almost three months' worth of reserves, which is not a lot. The owner draw is about $450,000, which is roughly a third of the profit. These numbers can vary, and it's possible to have a great year followed by a year with lower revenue.

In many successful businesses, growth is often gradual, starting from six figures and then climbing steadily upwards. 

For example, a business could start at $250,000, grow to $700,000, then $1.2 million, and eventually reach $3.3 million. This kind of growth is not typical, as it tends to be more common for businesses to experience ups and downs in revenue. After a great year of $3.3 million, it's possible that the next year could see a decrease of 10% or 9%. 

Although this is not a significant decrease, payroll costs tend to remain the same even when revenue goes down. In fact, some employees may be looking for a raise due to inflation or other factors. To account for this, a 4% raise could be applied across the board, resulting in a total payroll cost of $925,600, which is an increase of $35,000 from the previous year.

When revenue is down, marketing expenses generally do not decrease, so an increase of $50,000 could be applied. Software expenses could also increase by less than 10%. Office supplies and miscellaneous expenses would remain the same, but education and training expenses could increase considerably, as this is often seen as a way to improve revenue. Additionally, as staff grows and matures, education expenses for employees may also increase.

Expenses have increased from $1.9 million to $2 million this year, while revenue has decreased by 9%. This means that expenses now account for 68% of revenue, compared to 57% last year, resulting in a profit margin of 32%. Although they will pay less in taxes, the speaker does not want to decrease their profit reserve, as expenses have increased to $170,000 per month. If they don't change anything, they will be down $275,000 this year, compared to a $17,000 surplus last year.

This highlights the impact that seemingly small changes can have on a business, as a 9% decrease in revenue, 4% increase in payroll, and $130,000 increase in expenses has led to a $300,000 swing.

What can coaching businesses expect when hiring

Coaching businesses often underestimate the impact of hiring on their cash, so I created a tool to help them see the full picture. The gray lines are for input, and the white lines show the calculations. 

The example is a $1 million business with $750,000 in expenses, resulting in a 25% profit margin and $250,000 in profit. They plan to hire a salesperson at $60,000 annually, but they need to consider additional expenses like health insurance, software, and retreat costs. Total cost to hire will be $78,000 annually. After expenses, profit drops from $250,000 to $172,000, decreasing the margin to 17%, below the desired 20%. I advise waiting until the margin is above 20% to avoid lowering it further.

Clients want to add a salesperson who can generate $200,000 in annual revenue. This should be factored into setting key performance indicators (KPIs). However, immediate expenses of $6,500 per month are added, assuming costs are spread over 12 months. Typically, there is a 90-day probationary period before a new salesperson starts generating expected results. During this period, costs may increase to $20,000. The spreadsheet can help project sales and revenue over time. The client can decide what these projections will be.

After six months, the increased profit is only $18,000 - $19,000 if we hire someone who is expected to bring in $200,000 in revenue. This means it takes a significant amount of time to see the return on investment.

The numbers can be changed to speed up the process, but it's important to be aware of the impact. The tool can also be used to see what happens if an employee is let go and how it affects profits. This tool is useful for predicting the outcomes of hiring decisions.

Key takeaways from this presentation

Coaching businesses invest in employees for their unique skills and the human element they bring to the business, but managing them requires careful attention and a significant investment. 

Financial analysis is crucial for determining profitability and staffing costs, including headcount expenses and other associated costs. By understanding the true cost of employees and their roles, businesses can better manage them and quantify their value. 

It's essential to plan for potential ups and downs in revenue and account for potential raises, inflation, and increased training costs. By doing so, coaching businesses can achieve profitability and grow their reserves, enabling them to manage their employees effectively and deliver their products successfully.