Can You REALLY Afford to Hire An Employee?
If you’ve been thinking about hiring an employee in your small business, you’re likely experiencing some anxious feelings, fear, and doubt.
“Who should I hire first?” And “How do I plan for hiring?” And...
Can I even afford to hire an employee?!?
You’re not alone in having these feelings or questions. I’ve faced similar feelings and fears when hiring before, and so have many other small business owners.
The key to overcoming these (and most) fears is to prepare yourself with knowledge and a plan. In this post, I’m going to help you do both!
We’re going to discuss four actions you should take when hiring your first employee:
Review Your Finances
Understand Your Investment
Start Small
Track Your Progress
By the end of this post, you’ll have a better understanding of when you’re ready to hire, how to invest your hiring dollars, and making the most of those dollars when you do hire!
4 Smart + Simple Steps to Financially Prepare for Hiring
Step 1: Review Your Finances
The first and most important place to begin when deciding whether you can afford to hire employees is a review of your income vs. expenses on your Profit & Loss Statement.
You don’t start hiring employees when you hit a certain annual income range. It’s best to look at it based on your individual business’s overall profitability.
Experts recommend that your business expenses should not exceed 30% of your gross income. (This may vary depending on whether you own a brick and mortar business, product-based business, or are a service provider.)
Let’s take a look at a simple example to see how this works:
Over the past several months, Aryn has made an average of $2,500 per month and has about $1,225 in average monthly expenses (factoring in monthly and annual payments, as well as investments in professional development).
1225 / 2500 = 0.49
0.49 x 100 = 49%
Based on the calculation above, Aryn’s expenses are nearly 50% of her total monthly income, which is on the high side. This means, Aryn probably shouldn’t add additional expenses to her business by hiring an employee until she either:
Increases income, or
Reduces expenses.
To do otherwise could mean that Aryn won’t be able to pay herself or her team, which could lead to laying off employees because she can’t afford the extra overhead. Obviously, neither of these situations is ideal.
How do you know if you can afford an employee? By reviewing your finances!
Take Action:
Review each of your expenses and ask yourself:
Is this expense truly necessary?
What alternatives are available to me?
Is there a program that combines multiple technologies I need?
How much money am I spending on courses / programs vs. time implementing what I’m learning? What’s my ROI?
What expenses can you cut that are simply not necessary?
Where can you combine and reduce your overhead in other areas?
By reviewing your finances and keeping your expenses in check, you’ll be well on your way to knowing when you can hire an employee in your business!
Now that you have a better understanding of your finances, let’s take a closer look at understanding your investment.
Step 2: Understand Your Investment
While yes, hiring is technically an expense line on your Profit & Loss Statement, it’s beneficial to view it as more of an investment in the long-term growth and success of your business.
When we view hiring as an expense, we see it as something expendable. Often, especially in major organizations, it’s one of the first places where cuts are made when companies are struggling financially.
However, when viewed and treated as an investment, companies do more to protect their investment and in turn, their team members. These companies know and appreciate the value this investment brings to their business.
When hiring employees, we shouldn’t view them as programmable machines, but rather as individuals with unlimited potential. But that only works when we view our team members as investments rather than expenses.
How do you know if you can afford an employee? By understanding your investment!
Take Action:
Think about what return you expect from investing in hiring an employee. Investments usually focus around: time, money, and resources.
Here are some examples of possible returns you could identify:
More time to focus on higher-level CEO tasks.
Less time spent in the day-to-day weeds of business.
More time to build and nurture important business relationships.
Less time focused on administrative tasks.
More time spent on money-generating activities.
Less time spent on maintenance activities.
More time with your family or doing hobbies you love.
Less time sitting at your computer for hours on end.
More creativity and innovation in your business.
Less spinning your wheels trying to solve all the problems by yourself.
What investments do you expect as a result of hiring an employee?
What commitments do you need to make as a business owner in order to achieve the best return on your investment (ROI)?
When you understand that hiring is an investment – and you treat it as such – then you have a much higher likelihood of getting a positive ROI quickly!
Next, let’s ensure that you’re not only able to afford to make this hire, but that it will be a smart investment with growth potential.
Step 3: Start Small
I often see small business owners get in over their heads when hiring employees because they’re not quite ready to support that level of staff.
But I also see the opposite happening much too frequently, when hiring is put off for so long that the business is struggling to grow (or sometimes even just stay afloat) because the need for employees is so great.
Having worked in large corporations for the first 10 years of my professional career, I can tell you that this can all be avoided through strategic planning.
Big companies don’t hire without a plan. And they don’t wait to hire until they’re desperate. There’s a careful balance of hiring before you feel like you’re ready in anticipation of the growth that is to come, but also not jumping straight off the cliff without a parachute.
The good news is that you don’t have to hire a full-time employee on a six-figure salary right out of the gate – whew! If that was the case, no small business would ever hire employees.
How do you know if you can afford an employee? By starting small on your hiring journey!
Take Action:
Start by hiring a part-time employee. Just 10 hours per week can be a tremendous help!
Offer a fair wage rate – but one that won’t break the bank (this is where knowing your finances comes in handy!)
Set clear expectations and goals for your new team member, so you can track the results of your investment and adjust as needed.
How can you start small when hiring your first employee?
What goals do you need to set in order to track your?
When you start small and focus on growing your team alongside growing your business, you’ll have a much better chance of success!
In our final step to ensuring you can afford to hire an employee and keep them around long-term, we’re going to focus on what to do once your new team member is on board.
Step 4: Track Your Progress
The two keys to making sure you can afford your employees long-term are:
Setting clear expectations and goals for them upfront, and
Tracking your progress toward reaching these goals.
In a similar way that you want to ensure a piece of software does the job you purchased it to do, you also want to ensure each of your employees are doing the jobs they were hired to do.
I often find that small business owners patch the needs of their growing business together with a hodgepodge of contractors and employees. But each and every individual you hire needs to serve a specific purpose in your business, otherwise, you might be making poor hiring and investment decisions.
Although this step seems like it takes place after you hire a team member, you must think about it beforehand to help you make smart hiring decisions.
Take Action:
Use the following questions to help you determine how you’ll track progress:
What goals do I want to achieve in my business?
What kind of help will I need to reach these goals?
How much can I invest in hiring help?
What will be accomplished by hiring help?
What expectations will I have for my team member(s)?
What goals will I need to set for them to ensure we’re aligned?
By reflecting on the expectations and goals you need to have in place for your employees in order to reach your overall company goals, you will be much better prepared to hire. You can be confident that you will be able to not only afford to hire employees, but also keep them long-term by working together on reaching the company’s goals in unity.
Final Thoughts
Hiring should never be a surprise, an afterthought, or a move made out of desperation. It should be a carefully planned and coordinated effort that is beneficial for both the employer and the employee.
By reviewing your finances, understanding your investment, starting small, and planning for and tracking your progress, you will be much more prepared and confident that you can afford to hire the right team members, at the right time, which will lead to more success for you, your team, and your business.
Authored by Ashley Cox, PHR, SHRM-CP