I hired my first employee 6 years into running Acacia. 6 years. It wasn't just caution that made me wait that long, although that was certainly a big part of it. But for most of those years I was intentionally working part-time so I could be present for my son while he was growing up. I had been laid off while on maternity leave, and that slow build was a choice, and I do not regret it. But I also remember exactly what it felt like when I finally got to the point where I had to make that decision. The math really felt impossible. What if revenue dips? What if I can't make payroll? What if I grow too fast and then have to undo it? That fear is really real, and I've watched it paralyze founders who had the revenue to justify the hire and still couldn't pull the trigger. I've also watched the absolute opposite play out. We actually see this all the time. Founders who hire fast, hire ahead of revenue, build a team they're really proud of, and then spend 6 months dreading the conversation they know is coming. That layoff conversation, which is never fun for anyone. The one where you sit across from someone who did absolutely nothing wrong, whose performance is great, and you tell them the business can't hold them anymore. That conversation is one of the most morale-destroying things that can happen inside of a small organization. Not just for the person who leaves, but for everyone who stays. They watched it happen to someone who may have become a really good friend. They are wondering if they're next. The trust damage from a layoff in a small organization is not a short-term problem. It takes a very long time to recover from. This episode is about building the financial model that prevents that situation. Not a theory, an actual formula you can run with your own numbers before you make any hiring decisions. If you are leading a small business with 1 to 500 employees, please hit that subscribe button. This is all I talk about: scaling businesses through your employees in a small employer, where it is very different than it would be in a large employer. We cover everything: infrastructure, onboarding, roles, the whole gamut. If you are leading any role inside of a small org, this is the place for you. Most founders make hiring decisions based on one of two triggers. This is what I see: someone is overwhelmed, or revenue feels like it's in a good place. Neither of those is really a financial model. The first is a reaction to pressure, and the second is a reaction to optimism. And both of them lead to the same place: a payroll structure that was built higher by higher without a framework underneath it that eventually has to be corrected. And the correction is always more expensive than the model would have been in money, in time, and in the cost of the people who trusted you to build something stable. What founders need is not permission to hire. They most always have that. What they need is a model that tells them what the business can actually hold right now and at the next stage before they make the commitment. That model anchors on one number, and that is your payroll-to-revenue ratio. Payroll-to-revenue ratio is exactly what it sounds like. What percentage of your revenue is going to payroll? The formula is straightforward, if not stupidly simple: total annual payroll cost divided by annual revenue, gross revenue, times 100. There you have it. That is your payroll-to-revenue ratio. Very easy formula, but sometimes everything that goes into that payroll number isn't included. So let's talk about it. Total annual payroll cost should include all salaries, plus employer-side taxes, plus benefit contributions. So for example, if you have a $400,000 payroll cost and an $800,000 revenue times 100, 50% payroll-to-revenue is what you're running. That number tells you how much of every dollar coming in is already committed to payroll. Everything else—rent, software, marketing, profit—that comes out of what's left. The ratio you should be targeting is not universal. It's not a number I can give you. It varies significantly by industry, and founders need to research the benchmark for their specific business model. A professional services firm where people are the product, which is what Acacia is, an embedded fractional HR support firm, we're going to run at a much higher ratio than a business where technology or product does the work and fewer people are needed to deliver. So there's no universal number here. I can tell you from my own experience, at one point Acacia was sitting at 80% payroll-to-revenue. For a fractional HR firm, our industry benchmark runs closer to 50 to 60%. That gap between where we were and where we needed to be was not sustainable. Something had to change. Either revenue had to grow into the payroll, or payroll had to come down. Knowing that number and knowing what it should be is what makes hiring decisions rational instead of reactive. Once you know your ratio, you can build what I call a capacity model. This is the formula that tells you how many hires your current and projected revenue can actually hold without putting you in a position where you have to take them back. Right. So step one is going to be to set your target ratio. You want to research your industry benchmarks, AI, or a good old-fashioned Google search. I can't believe that's old-fashioned at this point. Can help, but you want to set a ratio you can hold at current and projected headcount. Let's assume you've targeted 55%. Step two, you're going to calculate your total payroll capacity by multiplying revenue times your target ratio to get your maximum payroll budget. So if you're doing $1 million in revenue times 55%, you've got a $550,000 payroll capacity. Step three, you're going to calculate your headcount capacity by dividing your maximum payroll budget by your average fully loaded cost per employee. So if your budget was $550,000, your average cost is $65,000. That's 8 and a half employees. Remember that fully loaded cost equals salary plus employer taxes plus benefit contributions. So you can have 8 and a half employees right now. Step four is to model the next hire. Take your current payroll plus your new role fully loaded cost divided by your revenue times 1,000. If that number stays inside your target ratio, if it does, then the business can hold this hire. If it doesn't, then revenue needs to grow first, or the role scope needs to be changed. And then step five is to project forward. Run the same model at 125% and 150% of current revenue. Does the hire still make sense at both levels? If revenue contracts 20%, what happens to the ratio? A hire that only works at your best-case revenue is a layoff waiting to happen. That last step is the one no one ever does. They model the hire against current revenue or against the revenue month they just had, and they don't model it against a contraction scenario that could be out of their control. And then when revenue softens, which it does in every business at some point, the ratio breaks, and the options narrow really fast. I am genuinely passionate about scaling, so I want to talk about it. Overhiring is not a growth strategy. It is a liability that gets socialized across your entire team when the correction comes. And in the economic environment we are in, the cost of that correction, the morale cost, the trust cost, the engagement cost, is higher than it has ever been. The founders that I have watched build well are not the ones who hired the fastest or the most people. They are the ones who hired responsibly. They ran the model before they posted the job. They built roles that the business could hold not just today, but at the next stage and the next one. They did not hire to the ceiling of what revenue could technically support. They hired with enough margin that the business could absorb a softer quarter without a major crisis. The business I have built is smaller than it could be if I had prioritized headcount growth. It's also insanely stable. No one at Acacia has ever been laid off because I hired ahead of what the model could hold. That stability is not accidental. It is the direct result of running this math before every single hire and respecting what the numbers say, even when the pressure to move faster is really real. That is the model I'm asking you to build, not because it is the easiest path. It isn't. Running the model takes a lot of discipline when you are feeling the urgency of growth. I know. But the alternative is making people commitments you cannot keep. And in a small business, the cost of that is not just financial. This model tells you what you can afford. If you recognize your business in any of this—hiring from pressure, ratios you have never actually calculated, a team that grew faster than the model justified—this is where your work starts today, not the next hire, this model. If you would like to talk about this or any other topic further, you can connect with me on LinkedIn. My profile is linked below. I share every day tips and tricks on growing a small business through its people. And if you are doing that as well, then I would love to be a connection for you. Most founders build reactively. They focus on sales, marketing, and product, and treat people as an afterthought until the people start costing them everything. A business where every hire is modeled before it is made, where the payroll structure is built to hold not just in good months, but in hard ones, where no one loses their job because the founder hired faster than the business could sustain. That's a business that scales. Let's build that.