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Hiring? Get Real and Do the Numbers

April 4, 2011

From E-Myth WorldWide

Original Post March 22, 2011

 

 

“I’m so ready!” Don told me.

“Are you sure?” I asked.

“Absolutely. The time is now. I can’t imagine another day without bringing somebody else on to help me do all this. I’m drowning.” Don said firmly.

“Ok, so let’s pull out your Operating Budget and take a look at the impact of bringing on a full-time employee.

“Um…”

“You’ve looked at that right?” I asked.

“Well, not really…”

That’s when the red flags started waving. The sirens went off. I leaned back in my chair.

“Don,” I said, “I love your enthusiasm about ridding yourself of technical work. But let’s take a step back.”

Occasionally I work with business owners who, like Don, an independent insurance broker, don’t have employees yet (other than themselves). These business owners are sometimes referred to as ‘solopreneurs.’ They’ve managed to build their ‘one-person-show’ into pretty successful businesses, but by the time they’ve joined the E-Myth Mastery Program, they’re ready for more. They’re thinking bigger. They’re ready to work ontheir business and build it into something separate from themselves. They have a vision for something great but have become so accustomed to the way they currently do business, they don’t know how to break out of the pattern and grow.

I absolutely love working with business owners who have their sights set on bigger and better. It’s profoundly rewarding to help somebody realize their dreams. It’s also my job as their business coach, to show them how to get bigger and better the right way. And sometimes, that means I have to tell them the cold hard truth. Sometimes the very thing they’re excited about and attached to is the thing that could hurt their business the most.

Like Don and this idea he had about hiring his first employee.

There are many, many things to consider before you hire your first employee. But one of the most important considerations is undoubtedly whether your business can afford to hire anyone and still remain profitable and cash positive.

It’s sometimes hard for a business owner to hear, but if your business isn’t profitable and cash positive with just you working in it, you’re not in a position to hire somebody else. If you feel you need to bring an employee on board to make it profitable and cash positive, you’re taking a big (and possibly devastating) risk.

Get Real and Do the Numbers

At E-Myth Worldwide, we help business owners formulate and validate your vision for the future of your business. We call this vision your Strategic Objective. It’s the vision of your ‘game worth playing,’ the snapshot of how your business will work when it is fully developed.

Now, there are several qualitative aspects to this vision: your company culture, the unique characteristics of your business that will make it stand out above the competition, the markets your business will serve and the value it will bring to everyone who touches it.

Still, the most basic and critical part of your strategic objective is quantitative in nature: will your business be able to produce enough money to support the lifestyle you envision for yourself? In this framework, your future employees must certainly be seen as a resource and an asset, but you must also be real about the expenses they will incur on your business.

When I started working with Don, he did not have a detailed Operating Budget nor did he have a Cash Plan in place. He was essentially operating with blinders on. He had great expectations because his business had been pretty successful up until now, but he lacked the true understanding and discipline to work out a long-term strategic plan to create profit and positive cash flow.

For solopreneurs, sound financial management is the only thing that will help you determine whether you should hire or not. It will help determine when you should actually bring an employee on board, and of course, what needs to happen in your business over time to keep that employee.

The bottom line is that you don’t hire anyone until you can see—on paper—that you are in a good financial position to do so.

What does that ‘good financial position’ look like?

It’s pretty simple, but sometimes hard to hear. You’re in a good financial position to hire someone when your business is producing a sufficient profit to afford paying an employee. This means you have money left over at the end of the month, or year, after you’ve paid all of your expenses and paid yourself. And remember, it’s not just their salary you have to factor in; you have to cover all the related expenses. Research indicates that for every dollar you pay employees in salary/wages, you’ll actually spend as much as 1.5 to 2 times their basic salary on related expenses, such as recruiting costs, employment taxes, benefits, workspace and resource requirements and management costs.

Your employees need to add an equal amount (or more) to the business than they take away, or you should not hire. And you can only have a sense of this if you are disciplined about financial management.

Don’s Revised Plan

Don wasn’t easily deterred. He really had it stuck in his head that a full-time employee was the answer to his growth goals. It’s understandable, he genuinely wanted to create a business that was not dependent on him and saw employees as the first step to making that happen. It took a lot of quantitative data (piled sky high) for him to finally realize that he wasn’t actually in a position to do so.

However, just because you can’t afford a full time employee doesn’t in any way mean you don’t have other options. There are always options!

I turns out that while a full-time employee wasn’t in the cards just yet, Don’s business was profitable enough to utilize some outside assistance. He did some shopping around and found an online company that he could use efficiently for many of the normal administrative tasks (that he really disliked doing anyway) for a price that was ideal. It’s worked out quite well and now we’re working on a plan for 2012 that includes one full-time employee. He’s ecstatic!

While there are many other important aspects to hiring, which also require your time and attention, start with the basics. Get real and do the numbers. Once you’ve established a sound financial justification for hiring, then you can concern yourself with everything else that goes into it.

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