Jackie Zach
January 25, 2024
Mike McKay and Jackie Zach discuss strategies for addressing hiring challenges in this podcast episode. The conversation focuses on the importance of using a cash flow forecast as a tool to evaluate payroll decisions, such as raises or new hires, and their impact on financial health. They emphasize that while many businesses are hesitant to increase wages, effective cash flow management and tools like the labor efficiency ratio (LER) provide a clear framework for making informed decisions. Mike explains how proper forecasting enables business owners to balance payroll adjustments with necessary price increases, ensuring profitability without sacrificing operational efficiency. He also highlights the role of workplace culture in employee retention, suggesting that poor management often drives turnover more than pay does.
The duo further stresses viewing payroll as an investment rather than an expense, sharing a compelling case study about a carpenter who generated higher profits due to his superior skill set. This example demonstrates how investing in the right talent can yield significant returns, debunking fears of overpaying. Mike warns against emotional decision-making, urging business owners to rely on logical, data-driven insights to optimize workforce and financial strategies. They encourage listeners to evaluate their financials, use simple tools, and seek expert guidance if needed, leaving them with a call to action to take charge of their business with confidence.
Realize you need a better handle on cash and your financials? Click here & take advantage of a complimentary business strategy session to discover the opportunities in your business today!
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Podcast Transcript:
Jackie Zach: Welcome back to another episode of Make More Work Less podcast. I’m Jackie Zach, and you are…
Mike McKay: Mike McKay.
Jackie: Awesome. Today, we’re diving into a hot topic: businesses struggling to fill job openings. Many are offering bonuses, raises, or higher starting wages, but I’m also hearing, “I can’t afford that” or “I don’t know if I can pay that much.” So, today’s focus is on paying people what you need to in order to hire them—and figuring out how to afford it. What’s the first tool that comes to mind for analyzing this?
Mike: The core tool for any spending decision in your business is a cash flow forecast.
Jackie: Right. What exactly is a cash flow forecast?
Mike: It’s like a higher-level version of a checkbook. You track how much money is coming in and going out. For most clients, especially those with annual revenues of $2–3 million or less, we look at this daily. Beyond that point, other accounting tools can help. For businesses with revenues between $500,000 and $900,000, we project cash flow daily, using accounts receivable (AR) and past trends—unless there’s been a major change in operations.
The goal is to see your cash balance grow. Unlike a profit-and-loss statement (P&L), which can show profitability even when you’re losing money, cash can’t be faked. A cash flow forecast includes core expenses like rent and payroll. While it might sound like a lot of work, setting it up only takes about 20 minutes per week for a month. Once running, it clearly shows whether you’re growing or not.
If you’re considering hiring someone or giving raises, simply add those costs to your average payroll in the forecast. This will show whether they’ll impact your cash flow negatively. Of course, pay raises often coincide with price increases for your products or services, so some math is needed to ensure balance.
Take one of my kids, for example—he works in a factory and got his 10th raise in just eight months. Some were due to added skills and role changes, but others were simply the company trying to reduce turnover by paying more. However, turnover often indicates poor management. If you’re paying market rates but still struggling to hire, the issue might be your workplace culture.
Our clients aren’t facing widespread hiring problems. Out of the 127 people and companies we coach, only two or three are dealing with inflation-related hiring challenges. Most issues stem from workplace conditions, not wages.
Lastly, don’t let others’ opinions cloud your judgment. If your peers say not to pay more than $10 an hour, that’s their “head trash.” Instead, use your cash flow forecast and tools like the labor efficiency ratio (LER), from Simple Numbers, Straight Talk, Big Profits! This ratio measures how much gross profit you generate per dollar of payroll. If the ratio improves, you can afford higher wages while increasing profits.
So, stop complaining. Use your cash flow forecast and LER to make informed decisions. Do the math, and you’ll know exactly how pay or price increases will impact your business.
Jackie: The other piece of this is thinking about payroll as either an expense or an investment, right? If you’re treating it as just an expense and trying to cut costs, how will you ever make a profit, get ahead, or grow your business?
Mike: Exactly. What kind of customer experience are you creating if you treat payroll as just an expense?
Jackie: That’s a great point.
Mike: A few years ago, we worked with a client in a similar situation. At that time, the average market rate for carpenters was around $19.50 an hour. This client wanted to hire a carpenter who asked for $30 an hour, but he immediately dismissed the idea, thinking it was too expensive.
Turns out, when we analyzed the numbers, the $30-an-hour carpenter was generating $2 more in profit for every dollar he was paid. In effect, the $30 carpenter was making $60 more per hour in profit compared to the lower-paid ones. His skill level was nearly 300% more effective—no mistakes, well-prepared for jobs, excellent scheduling, and efficient work.
Sure, some tasks were only worth the $19.50 rate, but we created a new tier of “master carpenters” who were evaluated based on their throughput. This change alone boosted profits by about $80,000 annually, simply by investing in the right people.
Jackie: Right, and that’s the key. So many business owners fear paying more and not getting the results they need.
Mike: Exactly, but that fear is emotional. Pay is emotional, and emotion has no place in business. Remember, 80% of sales decisions are driven by emotion and 20% by logic, but running a business should rely mostly on logic. If you let emotions guide you, it’ll cost you money—and potentially your business. Math is logic.
Jackie: Yes. And payroll is an investment, so how are you measuring that return on investment?
Mike: Start with simple tools—schedule a pivot session with Jackie to talk about your financial strategy. If it makes sense, we’ll help you do a full diagnostic of your business. The goal is to stop getting stuck in emotional thinking and focus on the math behind your business. Clear decisions come from logic, not from whatever advice your buddy gave you over beers last night.
Jackie: Haha! If you’re not crunching the numbers in your business or keeping track of your financials, now’s the time to start. Need to hire great people and invest in them? Use logic and let the math guide your decisions. And if you’re not sure how to begin, give us a call.
Until then, what’s one action you’ll take today? Go out there and kick some ass!