Recruiting and hiring good employees is one of the most critical aspects of running a business. While finding the right candidates is crucial for every company, there is tremendous pressure for small business owners to make the right hiring decisions.

Each new employee impacts the company culture and productivity far more than at a large firm, and a bad hire has the potential to significantly stress your bottom line. Just as you focus on how to recruit the best people for your business, it is also important to consider the impact of poor hiring decisions. Bringing on an employee who isn’t suited for the job or a fit with your company culture can be costly in terms of time and money as well as employee morale.

The Financial Impact of Hiring the Wrong Employee

While statistics vary, there is no doubt that the financial impact of hiring the wrong person can be significant. It is not uncommon for business owners to underestimate the dollars-and-cents cost of a bad hire, in part because they expect a certain amount of turnover. However, turnover resulting from poor hiring decisions is something all business owners should try to minimize.

The U.S. Department of Labor estimates the average cost for each bad hire can equal 30% of that person’s annual earnings. A survey by Career Builder found that hiring the wrong person for a position costs companies nearly $17,000 on average. This is because there are numerous ways that hiring mistakes can wreak havoc with your budget.

According to the Society for Human Resource Management’s (SHRM’s) Human Capital Benchmarking Report, it takes approximately 42 days to fill a given position (even longer for management positions) at an average cost-per-hire of $4,129. This takes into account the amount of time and money a company spends interviewing, screening, and making offers to candidates.

In addition, businesses invest considerable resources getting new employees up to speed. Onboarding expenses often include training, materials, and additional supervision for new hires. When an unsuitable employee needs to be let go, termination costs must be factored into the equation. A Robert Half survey found that although 58% of employers realized their hiring mistake within a month, the termination process took nearly twice that amount of time (8.8 weeks). An additional five weeks passed before a replacement could start working, resulting in additional work for existing staff.

The Cost of Lost Productivity and Morale

If an employee is not suited for the job or has a negative attitude, the time they spend not working can result in lost sales, production, and/or revenue. One study reported that 39% of hiring managers reported drops in productivity due to underperforming employees.

The productivity drain caused by even one bad employee is not easy to quantify, in part because of the effect their poor performance can have on client relationships and the rest of your team. Hiring someone without the right skills often saddles good employees with additional responsibilities, heavier workloads, or the burden of redoing work that has been done incorrectly.

The added pressure on top performers can result is less efficiency and more employee dissatisfaction. Businesses in the Robert Half survey reported a 53% increase in stress on the remaining team and a 20% decrease in employee confidence in management’s ability to make good hiring decisions. Unfortunately, the resulting loss of morale often leads to more turnover.

Minimize Mistakes by Establishing Good Hiring Practices

The best way for small business owners to assemble a great team is to have effective procedures in place for evaluating job candidates. As with every aspect of running your business, a hiring strategy will help you set goals, focus on the process, and avoid making costly mistakes.

Start by identifying the traits and competencies your company values and that every employee should have in common. Creating a well-defined culture based on these values makes it easier to determine if potential candidates are a fit for the company, not just the job.

Develop job descriptions that are clear, accurate, and focused on what your firm has to offer. Emphasize that you are not only searching for a particular skill set, but that your business is a great place to work. Communicate what you’re doing to retain your employees, and ensure that your brand embodies the best aspects of your culture. Word of mouth is a powerful marketing tool, and when people talk about your company, you want them to focus on the positives.

Make sure you identify and develop employees for leadership roles and involve them in the screening and hiring process. Individuals who have risen through the ranks know your business intimately, and they are well positioned to spot a potential hiring mistake before it happens.

Whether you need a seasoned executive, entry-level workers, or temporary seasonal staff, there are many benefits to working with a reputable staffing firm to fill your open positions. Outsourcing this process to experienced professionals will allow you or your HR team to focus on interviewing only the most highly qualified candidates. This can result in a higher success rate as well as give you back the time you would have lost trying to do it yourself.

Hiring the right people from the start is the single most effective way to reduce employee turnover. Creating and implementing a solid hiring strategy will help you build a team that values the work you do and is dedicated to helping your company grow.

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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.