One of the biggest costs you can absorb when starting and growing your business is payroll. The learning curve on training someone is big, so if you’ve made the wrong hire, you’re going to have to start all over again with somebody else.
The process gets expensive quick because you waste time and energy on all kinds of things that yield no return. From a financial standpoint, this is where you’re going to lose the most money the fastest if you make the wrong hire.
“You need to make sure your business is able to afford [a new hire] for a few months when they have that learning curve,” says Rikka Brandon, Hiring Expert for Entrepreneurs.
Is it Too Soon to Hire?
“One of the most challenging things for entrepreneurs with growing businesses is to know when it is truly time to hire. The media and coaches bombard entrepreneurs with advice to hire out tasks and support,” says Rikka.
“As the busy entrepreneur the idea of handing some of the tasks over to someone seems dreamy. The unfortunate reality is many entrepreneurs hire before they are truly ready.
Financially, if your business can't afford to carry the new person for at least two months without cutting into your own pay it is too early to hire help (even if you really really want to).
Operationally, to be successful hiring you need to be really clear about what your business needs to move forward and be able to set and communicate the activity your new hire will need to do on a daily, weekly, or monthly basis to meet those needs.
So, if you have a vague idea of needing ‘help' you need to take the time to really get clear about what you need to have done (and be honest about if it is realistic) before you start spending payroll on someone.”
As part of the Profit First model, if your business falls into the $0 – $250,000 profit range, you need to make sure you're paying yourself first. Knowing your gross income is a good start, but how much of that is profit? How much is saved for expenses?
We’re perpetually being pummeled with, “You need to maximize your time by focusing on what you’re good at and outsource the rest.” It was a very hard lesson we personally had to learn that when you’re trying to build a system that scales, you’re trying to hire people to do things you should actually be doing first, and you should be paying yourself first to do.
The Profit First suggestion is that you allocate 50% of your revenue (your gross profit) to your pay as an owner, because you should be doing the work and creating the systems while you do the work.
If you want your business to stand the test of time and scale well, you have to do the work first and create the systems. At first, we overlooked this part of the process and it’s been a very expensive lesson.
From a Profit First standpoint, if you're in the $0 – $250,000 gross revenue range, here's your financial breakdown for any money you have coming into your business:
- First, take out 50% for owner pay
- Second, save 15% for taxes
- Third, save 5% as profit
- Lastly, the 30% remaining is for operation expenses
That final 30% of your real revenue (your gross profit) is where you'll find the money to hire someone to support you, but only once you know exactly what you want them to do, and you have a system and process in place.
“Get clarity, figure out what you can afford, what you need, and fill that need. Don’t try to mold your job description to fit the best candidate who applied because that is not how successful companies go about growing,” says Rikka.
Contractor vs. Employee
When you've taken the time to look honestly at your numbers and what you could hire someone else to do for you, you have one more key decision to make: should you hire someone as an independent contractor or an employee?
“I always like to start a person on a project if I can. I only go employee when I’m really clear that I have those 40 hours of work, day-in and day-out,” says Rikka.
Here at The Bottom Line, we bring a new team member on for a 90-day pre-hire as an independent contractor, then work it into an employee situation versus hiring on right away.
This method has been very effective for us to gauge how well we work with someone and if they fit into our company culture. You need to decide what is best for your business.
From the perspective of the IRS, it all has to do with the amount of control you have over the person you hire.
Do you tell this person what to do, when to do it, and where to do it? Do you provide them all the tools in which to do their job? Those are big ones that really identify that they're an employee if the answers to those are yes.
We prefer to avoid scare tactics, but if you know a team member is an employee and you're paying them as a contractor, you can get hit hard financially if you are discovered by the state or the IRS. Not only can you get hit with penalties, but you'll also owe all of their back taxes in one lump sum.
This is one of those things that you could be risking your business on a decision you really hadn’t thought through. I’m always one about if you do your best to do what’s right, you really don’t have to worry about the consequences because they’re covered, they’re taken care of.
The Bottom Line
“Right now, you feel trapped – the amazing thing is you’re not that trapped,” says Rikka. “There’s always a way out, opportunities in the problems, and you can figure it out. I just want you to really think – you might feel trapped, but you’re in charge of your own destiny.
This is your business, and you can make the choices necessary to move it in the direction you want. Start with a fresh sheet of paper, clear your mind, and describe what your ideal business would look like today, knowing what you know now, how would you build it? Then, you can figure out how to get from where you are to that.”
So, we're curious, is a hire on the horizon for you in the New Year?
Share with us in the comments below what you do to make sure your hire is financially sound and amazing!
