How To Know If Outsourcing Is Hurting Your Profit Margin

As business owners, our time is limited. There are a million things we want to to get done to grow our Cash Flow and reach our goals. If only we had a helpful clone! Naturally, given technology limitations, the best way to check off more things on our to-do lists is to hire some help. But how do you know when that extra expense is helping or hurting your bottom line? When is your outsourcing profit margin too low?

Hiring contract or freelance help is a decision that should be made the same way as any other expense. By knowing your true return on investment. If you set targets before hiring, and regularly check in on performance once your new team member is on-board, you can be sure to keep ramping up your business’ Cash Flow! Here’s how to get started.

Knowing What Your Time Is Worth

Entrepreneurs are notorious for undervaluing their time. The trade-off between doing something yourself and hiring help isn’t the difference between paying for it or getting it for free. You have to take into account the opportunity cost of your time.

First, you need to determine your hourly profit. How much do your cash flow generating activities, the actual function of your business, net you an hour? Do you bill $100 an hour for coaching? Could an hour more networking a week net you three new clients this month? And how much is a new client worth to you? This number is your baseline.

Then, you have to be honest with yourself about how long it would take you to complete the task you wish to outsource if you did it yourself. Try your best to ignore how long it takes the contract worker to complete tasks—unless you pay them hourly. This is all about appreciating your own skill sets and limitations. I know it would take me hours to backup and update my website every month, even though it takes the tech company I hire to do it minutes. That makes their work all the more important to me!

Now you have everything you need to understand the opportunity cost of insourcing versus outsourcing. If the cost of a freelance service is less than the profitable hours you would give up to complete the task, outsourcing is probably worth a try. That freed up time in your schedule should pay for itself!

Setting Goals For Your Outsourcing Spend

What about outsourcing tasks that aren’t strictly necessary, but you think could ultimately help your bottom line? Sure, hiring a good bookkeeper is easy. But what about the social media manager who says they can drive more foot traffic to your store or clicks to your website? Or a design professional who offers marketing materials to improve client conversion?

These decisions are much harder and need more reflection. As you scale, building a high-quality website or buying beautiful business cards, like those of your larger competitors, are tempting. We just need to remember bigger isn’t better if, ultimately, our cash flow conversion is hurt.

How will this expense bring dollars to your business? Remember not to fall into the trap of, “Having a weekly unique blog post on my website will increase traffic and more sales conversions.” Set a specific goal for a percentage increase in traffic and number of new sales or clients. You need your outsourcing goals to be measurable.

Having measurable goals means you can choose to outsource tasks that will have the greatest impact on your bottom line. Money, like time, isn’t infinite. And if you have an ongoing outsourced expense, tracking its conversion versus your goals regularly will help you weigh new opportunities versus existing ones. Just because you’ve made an expense in the past, doesn’t mean you can’t cut ties now!

Sticking To A Reasonable Test Period

So you know your time is worth more than the cost of your outsourced work. And you know that work is really an investment to improve your bottom line. But how do you know when to cut ties? And how do you make it easier on yourself to let contract workers go, even when they’re doing quality work?

The final stage of hiring freelance workers without hurting your profit margin is to set reasonable test periods. Profitability improvements from outsourcing won’t happen overnight. The problem is, many scaling entrepreneurs lose their expenses in the shuffle.

How does that happen? Month one, you don’t see an impact and don’t expect to. Then, there is a little movement in month two towards the goals set above, but not the full benefit you ultimately hope. Month three, you forget to check. By month four, five, and so on the cost has become a regular part of our business. You have gotten into the rhythm working with that freelancer and have no idea if the cost ever hit the conversion targets you needed. Oops!

The key is to set regular reminders. Let’s say you think a new expense will take two months to gain traction, then allow you to increase sales conversions by 10%. Consider setting aside half an hour in your calendar for four months after making your new hire. When the time comes, see how month three and four went in reality.

For one-off projects, like marketing materials or improved copy for a sales funnel, this check-in will let you know if repeating a similar expense makes sense for you in the future. For ongoing expenses, like virtual assistants and writers, you’ll have given yourself an out if you aren’t hitting your goals.

Cash Is King – Spend Yours Wisely

Like everything in life, learning to make smart outsourcing decisions requires practice. As a business owner, you can’t be afraid to make investments, accept the losers, and double down on the winners. Not everything will work, but choosing to be thoughtful about your expenses will have you generating more cash in no time!

The views and opinions expressed are those of the guest author and do not necessarily reflect the views and opinions of MindShift.money.