Aaron from CampHire, a recruiting start-up for summer camps, started our last coaching session with a really interesting hypothesis. His idea was he could hire more experienced team members for higher salaries. Although this move would come at a higher initial cost, he believed it would actually save money because the new employees would be able to work more efficiently. While my instinct in these situations is to experiment and find what works, I knew the time and expenses of hiring would not be worth it. So, I suggested Aaron try a different approach.
Our goal was to understand the potential impact this employee change could have on the business. For that, we turned to our financial projection. We had recently updated CampHire’s 12-month and 5-year financial projections as part of our annual planning process. Variables like year-over-year growth, employee salaries, and marketing expenses are all modeled using a table of adjustable inputs so it’s easy to understand cause and effect. We also try to incorporate as many real-world measurements into our projection.
After determining the cost per placement, we projected 75% growth from year 1 to year 2. Since we already knew Aaron’s employee expense per placement and projected placements, we could estimate his total year 2 employee expense for placements. This same method is used to project the cost and overall profitability of the business in year 5 in our 5-year financial projection.
If we adjust our model by raising the hourly cost and reducing the hours, we can understand how those changes impact our profitability in year 1 and year 5. By making this change, we could project a 3% increase in profitability in the business. Not bad, but also not a large enough impact to warrant the change.
We tried modeling if we hired both the higher and lower cost employees to increase the number of placements. We used the founder time to increase the number of camps we would recruit for. This resulted in a 33% increase in profitability in year 1 and a 50% increase in profitability in year 5. This option could potentially accelerate the business for years to come.
Financial projections help start-ups look ahead to the future of their business and understand the key drivers of performance. In cases like this, they can also be used to make informed decisions to focus efforts on high-impact activities that accelerate your growth. For Aaron, running these financial projections helped him make the most profitable decision for his company.