Listen, how do you know if you have enough money to hire your next employee? Or your first employee? This is a rather difficult question that can only be fully answered through one-on-one coaching, because each business is so unique and dynamic. If you’re not plugged into a mastermind or coaching relationship, please consider doing so. Obviously we’d be honored to serve you in that capacity.
But in this post, I’m going to list some general guidelines for figuring out if you have enough money to hire your next employee. We want to start off with 3 questions, and then talk about some possible solutions:
1. Are you operating at maximum efficiency with your current team? In other words, do you have a productive labor force? Oftentimes business owners look to hire more when really they need to better utilize the people they already have. So before you bring onboard someone new, make sure the existing team you have in place is getting it done.
2. Would it be better to purchase a system or technology instead? Something that would make it so you don’t need to hire an extra employee. Investing in the right technology can help your organization become more efficient, many times at a lower cost than adding one more person to your payroll. See if this is an option for you before opening up recruitment.
3. If you conclude that hiring a new person is the right move, does it have to be a full-time employee? Is a part-timer enough, or could you outsource the job instead? Basically, figure out what makes the most economical sense for your situation.
After you’ve carefully considered the three questions above, you can then move on to the points below. They’re crucial for helping you determine whether or not you have enough money to afford that new employee:
1. Do you have 3-6 months’ worth of salary saved up in your growth account for the new employee? We go into more details about this in another blog post, but the growth account is just a bank account where you save up for major expenses. Hiring someone new is one such expense. I suggest setting aside enough money so that you’d be able to pay the new hire for 3-6 months, just to give yourself some wiggle room in case it takes a little while before you start getting a return on your investment. By the way, I’m using the 3-6 month figure only as an example. Your numbers may be different depending on the nature of the position you’re hiring for.
2. This goes back to knowing your numbers really well, but are you currently making 15-20% net profit? Hiring a new person is expensive. Even if you are at 15-20% net profit already, a new hire may drop that number down to 10%. This is usually okay because it’s a temporary situation, and the company can still sustain itself during the new hire’s adjustment period. However, if you’re only at 10% net profit currently and you bring someone on, that number might drop down to 5% or less. Then you’re walking into danger zone. So get to know your numbers well, and don’t let your net profit drop too low for comfort. A new hire may not be worth the risk.
3. Commission-based positions are not risk free. A lot of people think there’s no risk involved with bringing on a salesperson whose pay will be 100% commission-based. This is not necessarily true at all, because it takes valuable time to train that person. And if you’re not training them, you’re paying someone else who is. So think through the monetary value of time before you hire, even if the position won’t be earning a base salary.
4. How quickly do you expect to get results? You may be able to hire sooner if you’re bringing on a revenue-generating person. For example, if the new hire is a marketing expert and you’re expecting a dramatic increase in sales within a month, that obviously is less risky than say, a new assistant whose impact may not be felt for a longer period of time. That means if the right revenue-generating candidate comes along, it might be a good idea for you to hire them even if you don’t have 3-6 months’ worth of salary expenses saved up in your growth account. Just be sure to set realistic expectations. And when in doubt, be conservative.
5. Do you feel comfortable acquiring debt? If you’re looking to really scale up fast, are you willing to take out a bank loan? Sometimes if your strategy is more on the aggressive side, you need a lot of cash. Too much to save up for in a reasonable amount of time. While debt should be used sparingly, it can still make sense in certain situations where hyper growth is the appropriate tactic. Also, if an angel investor comes along, are you willing to give up a percentage of your company so it can grow faster? These are all good questions to think about if you’re looking to expand your team in a big way.
6. If necessary, are you willing to let the new recruit go? This is often one of the toughest hurdles that small business owners have to face. Let’s say you just hired a new employee. You’ve put together a job score card that clearly defines his roles and responsibilities. You onboard him, provide ample training, and give him enough time to learn the ropes. You make sure that he has all the tools necessary to succeed. Basically, you’ve done everything you can. So, what if he’s still not making the cut? Are you willing to let him go quickly? It’s a tough task, to be sure. Many business owners know early on that a new hire is not the right fit, yet they keep that person on for too long. Regardless of how bad it feels to terminate an employee, not doing so is a drain on your company’s resources, can lower morale, and may even end up destroying your business altogether.
7. Is there a financial bankruptcy risk if you bring on a new employee? For example, if you’re a solopreneur and you’re thinking about recruiting for a $150k/year position. Never do something so crazy. There’s no reason to put yourself into such a risky position no matter how promising the new hire may seem. I get that you may be feeling optimistic, but you can never be sure that things will always work out exactly the way you planned. Never risk it all.
So those are seven things to think about when you’re considering hiring your next employee. Again, they are only meant to serve as guidelines. If you take them into account when making hiring decisions, it’ll make a huge difference for your business. So go out, take massive action, and have a better than amazing day.