Do You Really Need to Hire? The Cash Metric to Check First
Can we afford to hire, and can we afford not to?
When a team is stretched, the question is not simply whether another person would help.
There are two financial questions to answer:
Can we afford to hire, and can we afford not to?
Hiring creates a recurring cash commitment. Salary is only the beginning. The company must also carry employment costs, onboarding time and the period before the new person becomes fully productive.
But delaying a necessary hire also has a cost. Work may be turned away. Delivery may slow. Customers may receive less attention. An overstretched team may begin to lose good people.
Hiring too early can weaken cash. Hiring too late can restrict the company’s ability to generate it.
The challenge is understanding what is creating the pressure.
Is profitable demand outgrowing the team’s capacity? Or is the team busy because rework, poor processes, weak customer fit or badly priced work are consuming time without producing enough margin?
One number can help make that distinction clearer: the Direct Labour Efficiency Ratio, or dLER.
What is the Direct Labour Efficiency Ratio?
The Labour Efficiency Ratio comes from Greg Crabtree’s Simple Numbers 2.0: Rules for Smart Scaling. Crabtree distinguishes between several forms of the ratio. This article focuses on the direct version: dLER.
It measures how much gross margin the company produces for every euro spent on the people directly responsible for creating and delivering its product or service.
The calculation is:
dLER = gross margin ÷ direct labour cost
Gross margin is invoiced revenue minus the direct purchase costs required to produce it.
For example, if your company resells software, materials or other third-party products as part of its offering, those costs are deducted before calculating gross margin.
Direct labour cost is the salary cost of employees who spend most of their time producing or delivering what the customer pays for.
Suppose a company invoices €10 million and has €1 million in direct purchase costs. Its gross margin is therefore €9 million.
If the direct employees responsible for delivery cost €2.65 million:
€9,000,000 ÷ €2,650,000 = 3.40
A dLER of 3.40 means that every euro spent on direct labour produced €3.40 of gross margin.
The ratio does not tell you whether the company is profitable overall. It tells you whether the cost of direct labour is producing more or less gross margin over time.
How should you read the number?
The most useful comparison is not usually against another company. It is against your own previous months and quarters.
Businesses calculate payroll, direct costs and gross margin differently. A professional-services company, a manufacturer and a software business may all produce very different ratios for valid reasons.
Our coaches have observed the following broad ranges in professional-services businesses:
- Below 1: direct labour is not covering its own salary cost.
- Around 1: direct labour is roughly covering salary, but probably not the full cost of employment.
- Above 2: the company is producing a return on its direct labour.
- Between 3 and 5: often a healthy range.
- Above 5: worth investigating rather than automatically celebrating.
A very high ratio can indicate excellent productivity. It can also mean the team is overstretched, underpaid or carrying more work than it can sustain.
The number matters. The direction matters more.
Track it monthly using the same calculation and learn what a healthy range looks like in your company.
What does dLER tell you about hiring?
The ratio should inform the hiring decision, not make it for you.
The ratio is healthy and the team is at capacity
When dLER is healthy or improving while the team is visibly stretched, the pressure may be coming from genuine demand.
The current team is producing margin, but there is more profitable work than it can deliver.
In this situation, delaying a hire may cost the company more than adding one. The business may lose revenue, weaken delivery quality or exhaust the people already carrying the work.
The ratio is falling while everyone remains busy
When labour cost is rising but gross margin is not keeping pace, adding another person may deepen the problem.
The work may be getting stuck in:
- rework and avoidable errors;
- slow or unclear processes;
- work that was priced too low;
- customers who require disproportionate effort;
- unclear priorities or ownership;
- services that have become too complex to deliver efficiently.
Hiring adds capacity, but it does not automatically remove friction.
Before committing cash to another salary, find out where the existing margin is being lost.
The ratio is unusually high
A very high dLER can support a case for hiring, especially if people are consistently working beyond reasonable capacity.
But check what is driving it.
Paying below the market can improve the ratio temporarily. So can pushing more work through the same team. Neither is a durable productivity strategy.
A healthy ratio should reflect a strong operating model, not underinvestment in the people producing the work.
What does the calculation leave out?
The standard calculation deliberately excludes several costs, including employer taxes and contributions, bonuses, company cars, phones and other benefits.
This keeps the calculation simple and consistent.
It also means a dLER of 1.0 is not financial break-even. The true cost of employing someone is higher than the salary figure used in the denominator.
Treat dLER as a directional management tool, not a complete profit calculation.
Its value depends less on including every possible cost and more on using the same definition every month.
What can the ratio not see?
dLER cannot tell you whether the right people are in the right roles, where friction is occurring, or whether a drop in productivity is temporary or structural.
It also cannot measure the human condition of the team. If people are already exhausted, that requires action regardless of whether the ratio still looks healthy.
The ratio gives you a signal worth investigating. It does not replace judgement, customer evidence or direct conversations with the people doing the work.
How should you use it?
Before approving the next hire, ask:
- Is our gross margin per euro of direct labour rising, stable or falling?
- Is the team busy because of profitable demand or because of friction?
- What revenue, delivery quality or customer value could we lose by delaying the hire?
- What inefficiency might we make more expensive by hiring now?
- What do we expect the new person to change, and how will we know whether it happened?
Expect the ratio to fall temporarily after a hire. The company takes on the cost immediately, while the person needs time to become fully productive.
That is not automatically a sign that the hire was wrong. It should, however, be visible in the cash plan before the decision is made.
The Direct Labour Efficiency Ratio will not tell you whether to hire.
It will help you ask a better question:
Will this person create the capacity the company needs, or add cost to a problem we have not yet solved?
ScaleUp Company International
Written from the combined experience of our coaches, entrepreneurs who have scaled companies themselves, and who sit with founders and leadership teams every week.