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. Yellow Belt
Table of Contents
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 more than 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 do a reality check before giving active consideration to hiring new staff.
The suggested routine is:
Eliminate
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.
Automate
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.
For many Owners, the first “hire” shouldn’t be a person at all—it could be automation using a comprehensive Software Suite like e.g. Zoho or HighLevel. Before hiring an admin, ensure your prefabricated routines are automated. If the workload remains high after automation, then a human hire is justified.
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.
Improve your Admin Efficiency
Many Owner’s tend to put admin tasks off as long as possible or do it in bits and pieces to fill in vacant time slots.
This sort of multitasking is proven to make you less productive and efficient.
Consider setting aside a block of time to fully execute some admin task and do them in a priority order so, even if pushed for time, your most important tasks get done. The time you save will help to postpone the need to hire and admin person. More on Time Management methods
Part-timers
You may be able to ease into a full-time staff member by using part-timers and contractors whose hours match the growth in your revenue. Eventually, you can replace them with your full-time hire.
Another advantage of this approach is that you get to experiment in a manageable way with the hiring process. This is especially useful if you are not experienced hiring and leading or if you are uncertain how fast you can grow your revenue to cover the new hire.
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.
Outsource
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. Over time, however, as your business grows, that might grow to several hours a week. And eventually expand enough 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.
- Payroll.
- 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.
The Financial Litmus Test
Before signing a contract, run these two quick checks:
The “Multiplication” Check: Will a new Revenue Generator produce at least 3x their Total Cost of Employment (TCE) in new gross profit? If not, the management overhead might make them a net loss.
The “Opportunity Cost” Check: If you hire an admin for $60k/year, will that free you up to generate more than $100k/year in new business that you are currently ignoring?
Better Estimation
You can get a more precise estimate of the necessary improvement in Revenue to fund your new hire with our prefab Routine to estimate Required Extra 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?
The Two Paths to Growth
Generally speaking, you can hire an income producer or an admin person.
Before choosing, you must understand the fundamental difference in how these roles impact your bottom line.
| The Revenue Generator (Producer) | The Administrative Support (Capacity Builder) |
| Primary Goal: To directly increase the top-line revenue. | Primary Goal: To increase efficiency and free up your time. |
| Examples: Sales reps, billable technicians, account managers. | Examples: Office managers, accounts. coordinators. |
| The Risk: They may increase revenue but also increase your management “drag” if you have to manage them as well as your normal work | The Risk: They are an overhead cost that doesn’t “sell” anything to recover their cost |
Assessing Your “Capacity Gap”
To make the right choice, you need to look at your current bottleneck. Use the following diagnostic to see where your business is currently “stuck.”
Scenario A: You have more leads than you can handle.
If your phone is ringing, your inbox is full of inquiries, or you are turning away work because you simply cannot perform the service fast enough, you have a Production Bottleneck.
The Verdict: Hire a Revenue Generator. You need more “hands” to turn those existing opportunities into cash.
Scenario B: You are busy, but you aren’t “selling” anymore
If you spend 80% of your day on paperwork, scheduling, invoicing or fixing errors, and only 20% on growth, you have an Administrative Bottleneck.
The Verdict: Hire Administrative Support. By offloading the $30/hr tasks, you free up 20+ hours a week for you to go back to doing $200/hr revenue-generating work.
The “Friction vs. Fuel” Framework
Think of your business like an engine. Revenue Generators are the fuel; Administrative Support is the oil that reduces friction.
Adding Fuel (Revenue Generator): If the engine is running smoothly but just isn’t going fast enough, add fuel.
Adding Oil (Admin): If you try to add more fuel to an engine that is grinding and overheating (missing deadlines, messy books, unhappy customers), the engine will eventually break. You must add oil first.
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.
Hire Knowns or Unknowns?
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.
Wrap-up
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.
A Disclaimer
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.
This article was provided by Scott Williams AO FAIDC. It describes the way best practice in many management areas has been brought together in the 12Faces GamePlan System. The Goal is to provide an easy to use and repeatable “flywheel” to improve small business owners’ outcomes. Scott is the Founder of NFP small business support services 12Faces and MentorSME and has a Philanthropic Foundation supporting students in education. Scott’s business Petals Network was National Small Business of the Year and 4 times in the Top 100 Fastest Growing Australian Businesses LinkedIn