This post was written by Chris McMahon and Larry Jacobson. Chris has spent the last 15 years in Talent Acquisition and HR leadership roles in high growth Boston area companies such as Endeca and 170 Systems. He is now Director of Talent Acquisition at Vistaprint. A recovering attorney, Larry has been in talent acquisition since 1996. He’s worked with a number of startups and is currently the Director of Technology Talent Acquisition at Vistaprint. In his free time he enjoys hot yoga, BBQ and outdoor activities.
The decision to hire your first employee is an exciting one and the difference between a self-employed entrepreneur versus being an employer is significant. If done correctly, it can catapult your business into new levels of success and if done poorly, it could be a mistake that can take months to recover from. So when is the right time to make that first hire?
There are a couple of key areas to think about but your most important consideration has to be, “Can I afford to hire someone?” If you find that your sales can’t support it, you have to dip into your personal savings, or you have to borrow more money from friends, family or investors then your answer should be no. Simply put, if you don’t have the money then you shouldn’t be hiring someone!
If you need to rely on additional sales to cover the expenses of hiring a new employee, there is an easy calculation to help you understand the additional revenue needed to cover those new expenses. Add the applicable total cost of the new employee (salary, benefits, cost for space, equipment, taxes, etc.) and divide that by your total gross margin. Gross margin is calculated as follows:
Gross Margin (%) = (Revenue-Cost of Goods Sold)/Revenue
As an example, if the first year cost of your new employee is $50,000 and you have an average gross margin of 25% then you will need to increase sales by approximately $200,000 in the next year to cover the new costs and maintain your current level of profitability. And always be conscious that (1) employee related costs are often higher than you thought so it makes sense to have a cash reserve that is about 20% greater than your estimate, and (2) there is a cost associated with your time to get the person up to speed.
Your second key consideration is determining that your goal is to grow your business (and hopefully have a life outside of it!) and if so, knowing that you can’t do it alone. Small companies that offer a specific service (think dog walker, electrician or freelance writer), can be much better suited for a sole proprietorship. But if you find that you can’t serve new customers and are losing current ones because you are short staffed, it is clear sign from your business to add bandwidth.
When you determine that your business does need another person, you will want to make a list of the skills and competencies needed to run your company and then make a list of the things that you are great at. The gaps between the two will help confirm what responsibilities a new hire should assume. Those responsibilities could be administrative so you can focus on sales or perhaps they bring specialized skills to help advance your product while you run the day to day of the business. It is never easy to find reliable, hard-working and talented people, so make sure to understand exactly what you need and then take the right amount of time to find someone who will be an excellent fit.
There will be clear signs that your business needs a new person, so recognize those signs and then move quickly! Your next decision is whether to hire a full-time employee or a contractor so we will cover the pros and cons of that in our next post.