Learn about hiring staff, the decision about when to hire your next member of staff and what positions to consider first. This article is aimed, primarily, at owners hiring their first few staff members. But additionally, it suggests a thought process and habits that will be useful even when your small business becomes larger.
Hiring Staff: The Hiring Dilemma
Hiring staff brings along with it the need to increase the Revenue of your business to compensate for the new hire.
The biggest impact is with your first hire, as it effectively doubles your wage bill. In turn, this means you will need to more than double the Revenue of the business; and that cannot be done overnight!
However, there is a limit to how much the business can grow while there are just one (or a few) people in the team. A one person Solopreneur business might be in the unfortunate position of never being able to generate enough Revenue to pay a decent livelihood because it can’t perform enough work.
How do you balance the need to grow with the risk and uncertainty of stepping down the hiring path?
Think Before You Leap
Do you see hiring a staff member as the only solution to your problem?
It is good practice to engage in a 3-step reality check before giving active consideration to hiring new staff.
The suggested routine is:
Can you remove the need for this job by making changes to your business?
Either, remove unnecessary tasks which will free existing labour to do what is left. Or, give active consideration to whether that line of work is absolutely necessary.
Another aspect to eliminating the need for staff is to work more efficiently. For example, if your Sales force needs to grow in order to service the leads coming from your Marketing, first consider whether those leads are of sufficient quality. If not, do you need more Sales people? Alternatively, is the solution to improve the quality of the leads. There are many other examples of this type.
Increasingly today, there are tools to replace the activities that people do with software and other automations.
For example, accounting has changed from manually recorded ledgers to highly automated systems. One aspect is importing your bank statements into your accounts.
Although automation may cost money, properly done, it can be a once-off, lifetime lasting, saving which replaces the need for hiring staff who have to be paid every week.
The message is to have a look at the existing work processes to see if they can be streamlined or reorganised. Do this before leaping to the conclusion that you need another member of staff.
Rather than take on work with hiring staff internal to the business, consider outsourcing the work.
There is a school of thought that if a job is not directly related to what you do, you should first try to outsource it.
Outsourcing comes with its own advantages.
Firstly, you can choose from the best work pool available. This may be more expensive than hiring a full time person but cheaper if they only have to work part-time and/or faster to do the job.
Secondly, outsourced labour can be easily replaced with other outsourced labour if the first person does not work out. This is much harder with people you have taken onto your staff.
Thirdly, outsourcing can expand to fill the need. Initially, you may only need an hour or two a week for a bookkeeper. Overtime, however, as your business grows, that might grow to several hours a week. And eventually expand to justify bringing the bookkeeping role in house. It is much harder to scale, with internal staff, smoothly. They tend to be a “whole person” or 40 hours a week at a time.
Fourth, a good outsourcer will already have better professional knowledge and supervision than you can offer, or afford, with your own staff. Consequently, you will have a better quality service than is achievable in your business; at least initially. It also reduces your own supervisory load on your staff.
Outsourcing lends itself to any task that is non-Revenue producing and non-Core to your business. Typical examples include the following:
- Accounting and bookkeeping.
- Various administration tasks.
- Social Media and digital marketing.
- Many Human Resources functions, including recruitment.
- Advertising in general.
Today, there are many online organisations where you can set tasks for people who contract to do a particular job. Similarly, much of your routine administration might be able to be handled by a virtual assistant; even ones operating in different countries.
Can I Afford a New Hire?
Most smaller businesses are financially constrained. In order to hire someone, something else has to be forgone. Often, that is Profit and Salary in the hands of the owner.
Also, as mentioned earlier, the amount of Revenue the business raises will need to increase to cover the wages cost. Most businesses cannot dramatically increase their Revenue overnight, so, you need some ‘buffers’ to absorb the financial shock.
Hiring Staff: Safety Margin
When hiring a new member of staff they will take time to get up to speed and begin to pay for themselves. Once they get up to speed it then takes time to make money for the business. In the meantime, you have to pay them each week.
Therefore, a wise business owner sets up a buffer of cash sufficient to pay for this “spin up”.
You maybe able to arrive at your own estimate of what safety margin you need. If so, use that.
In the absence of your own estimate of a safety margin, use a rule of thumb that you have at least 2x the monthly salary set aside, in cash, that is immediately available. This buffer allows time to have the person accelerate and become sufficiently productive to earn their own salary.
Related to this, you may find that someone you start as an employee does not work out and you have to let them go fairly quickly. Having this buffer allows you to, where necessary, employ more than one person in the position while you find the right one.
By the way, this is also a good reason to have a trial period built into a new employee’s contract, where possible.
Bear in mind that the new employee will directly cost the business their salary and benefits. But, may also come along with indirect costs like training, tools and equipment, and office accommodation.
As a simple rule of thumb, over the years it has become obvious that any new member of staff has to generate, either directly or indirectly, at least 3x their salary:
- One time is for their direct salary costs.
- The second time is for their overhead costs, like tools and supervision. This is by more senior Managers who are non-Revenue earning themselves.
- The third time is a contribution to the business Profit.
The moral is that hiring a person when they do not meet this benchmark in the future, means that the business will begin to go backwards financially.
A Revenue Growth Path
Very likely, you will need to increase your Revenue to compensate for the costs of the new hire.
This is not a simple Revenue dollar – for – Salary dollar arrangement.
You only get to keep the Gross Margin of your Revenue (Revenue less Cost of Goods Sold). So the necessary Revenue boost is more likely to be 2-3 times the cost when hiring staff.
For your peace of mind, you need to be sure you can increase your Revenue sufficiently to cover the Cost.
Further, you should not hire until the Revenue boost plan is ready, or has, started. If you are a one person business, it might be hard to actually execute additional work with the limited resources, but you might be able to book the work in for later.
One advantage of working on a Revenue basis rather than a Cash basis, is that it is a tougher test to pass. It means that you will have taken some time to tune a Revenue generating system before hiring. Rather than potentially expending Cash and then having to turnaround to generate Revenue.
Hiring Staff: Affordable Hiring Cycle
Many businesses adopt a hiring cycle that is almost guaranteed to keep them in the financial doldrums.
If a new person is hired, when there is not sufficient Profit coming in to pay their costs from the moment they are hired, there will be some period of time when Profits are eaten up. Consequently, the business goes into a loss situation while the new hire comes up to speed. Because of this, assets like bank accounts, are reduced and other sources of cash, like credit cards, may also be eaten into.
At some point, the new staff become productive, and Profits resume a healthy situation.
And then, the process begins again; hiring staff is done before the Profit is sufficiently high enough to pay their costs from day one.
This means the business is in a Profit, then loss, then Profit cycle every time a new member of staff is hired. Though the business might get through this cycle intact, it is one more source of stress on the owner; and probably unnecessary.
An alternative, and better approach, is to hire a new staff member when the Profit projections are sufficient to pay their salary going forward. Rather than a period of losses and asset consumption, while the new staff member comes up to speed, the business faces a period where Profit remains at a consistent level. Additionally, it then begins to grow once the new person is at the point of earning more than their costs.
What Positions to Fill First?
Above, we talk about the importance of hiring staff who are Revenue producing. Therefore, ideally, generate sufficient additional money to pay for their Salaries several times over.
In particular, your initial staff hiring should be Revenue generating people. Although it is tempting to hire a receptionist or bookkeeper, these people will not produce Revenue directly, or possibly even indirectly, to pay for their expenses.
Therefore, it is likely that your first hires will be in either the operating side of your business or Sales. This may be largely dependant on your personal skills. If you are a good sales person, you will be more effective in the Sales role. Consequently, hiring staff in the early stages will be in production roles. On the other hand, if you are very good at production, but less effective at Sales, your early hire should be in the Sales area.
Non-Revenue Generating Staff
There is a particular issue relating to the employment of non-Revenue generating staff, such as administration.
The test for when you can afford to employ a non-Revenue producing member of staff needs to be even more thorough than where you employ Revenue producing staff. This is because they will not directly earn Revenue to offset their wage.
The test is probably something like:
“Will this person enable the Revenue producing group to be sufficiently more effective and therefore pay for themselves”.
If a non-Revenue producing hire is under consideration, and fails this test, it will be time to consider the eliminate/automate/outsource scenario mentioned at the beginning of this article.
Hiring Staff: Sales and Consumer Success Staff
In the case of Sales and Consumer Success related staff, the test is whether their inclusion improves the customer’s lifetime income to the business. If they do not add or keep customers of sufficient value to pay for their own salary, the position probably should not be created.
Supervising and Managing Staff
A manager, or supervisor, can generally manage somewhere between 8 and 12 staff. The theory of this is known as the Span of Control. The actual numbers may vary with your industry. Go to the article: Secrets to Streamlining Organisation Charts to find out more.
If they are in charge of fewer staff, they are possibly under utilised. Also, they are less likely to recover their costs from the efforts of those they supervise. In this case, you could group several specialities together under one manager. Later you can break the group into two as the number of staff being supervised significantly exceeds the upper limit of the Span of Control.
If they are managing significantly more than (say) 12 direct reports, they may not be doing it well.
Ideally, when the business is small, the best supervisors to hire are those who will be directly earning Revenue themselves, as well as supervision. These supervisors are called “leading hands”.
Address My Weaknesses
It makes sense to hire someone who compensates for your personal weaknesses; providing that those weaknesses are in a key area, like production or sales.
However, it makes little financial sense to hire a non-Revenue earning, full-time member of staff to replace an administrative weakness on your part. This is until at some time in the future when your business is sufficiently large to warrant the expenditure.
Hiring Staff: Staff the Constraint First
We are great admirers of the Theory of Constraints. Essentially, this says that any staff hired in an area that is not the limiting factor in your business will not make much impact. Go to the course introduction: SM5.0 Theory of Constraints.
Therefore, always try to identify the (usually) single thing holding the business back. And then hire to reduce that limitation. Otherwise, your new hire will not be maximising the benefit to the business of hiring more staff.
Hiring Staff: Fractions Versus Wholes
We tend to think of employees as whole people. But it is possible to employ “fractions” of people.
For example, you maybe able to take on an apprentice or intern. These people will give you a hand but will be more economical than a full- time, fully trained, person.
It may also be possible to take on a semi-retired person who only wants to work shorter hours.
In the same vein, you maybe able to make the position part-time or casual. As your Revenue increases and you can afford more time, the part-time or casual position can move closer to full-time.
Known or Unknown
Do you have the option of choosing an early staff member from people whom you know? They come along with certain weaknesses, but at least you are often fully aware of what they are and can build a compensatory system to manage them.
Alternatively, if you hire people unknown to you, they come along with an unknown set of weaknesses and unknown ability to perform. Although you might get some “gems” you may also get “duds”. Early on, you do not want to many missteps in your staff hiring. For this reason, you are wise to hire a person who is already known to you, and for whom you know the limitations and can adapt.
Staff Hiring: Churn
Whenever you hire, there is a risk that they will “churn” and leave you in a comparatively short time. This can come about if they are not ideally suited to the position. It means that, not only do you lose the entire amount paid to them in their (short) period of employment, but your outlay starts again with the person who replaces them.
There are rules of thumb that suggest that hiring the wrong person on staff can set you back several months. If you consider the interview period, training period and the period taken to generate more than their costs, this can easily spread out to 3 to 6 months.
In many industries, there are also substantial risks when you hire a “bright spark”. They may leave you at some future date to start their own business. This is a well-established cycle in many trades. Someone works for a couple of years, for example as an electrician, and then leaves to start their own business. Another side of this coin is that people who are not planning to launch their own business may lack the drive of someone who does.
You are facing the situation of do you hire a competent, but unexciting, individual or an exceptional individual who may leave you to start their own business. Early on, you might want the “bright spark” because that will get you going as quickly as possible. But, you need to face the reality that they may leave you.
It is also possible for you to hire part-time and casual staff. This gives you a way of reducing the total amount of Revenue necessary to support the new employee. Unfortunately, if you hire someone who really needs a full-time salary, they will be looking around for a full-time salary; even while working for you. When one turns up, they may leave. This creates churn and puts you back in the hiring staff cycle.
The moral of the story is that you may want to employ solid, reliable people full-time, rather than a particularly exciting and/or part-time employee who may leave you in the near future.
When your business is quite small, you should assume that hiring staff is effectively taking money directly away from your personal Salary and Profit stream. Any growth business, especially in its early stages, is likely to surrender a financial return to the owner in order to grow.
You need to give active consideration to whether taking on another staff member, and thereby forgoing money in your own pocket, is something that you (and possibly your family) can bear. If not, rather than add to your stress, it maybe better to wait until the business is in a better position to be able to pay you sufficiently well, even when adding the extra salary. Keep in mind, that adding your first member of staff, effectively doubles your payroll; a big step.
There are lots of employment scenarios and many different practices in different industries. The advice in this article is general in nature and should not be relied upon in specific cases. If necessary, consult an expert.