Like we discussed last week, I frequently hear questions about hiring, but the most common is, “How can I be sure I can afford to hire someone?” This is often a problem with entrepreneurs because no one can do it all, and your business can’t grow if things aren’t being taken care of. When your business isn’t bringing in enough money to be sure you can hire, how do you know if you can consistently write a paycheck for a new employee?
Most businesses grow their income on a curve. They start out small and increase their income as time goes by. It usually accelerates over time, so we have a curve if we are drawing a graph. When we hire employees, we typically see a graph with a step increase in our expenses. In other words, we’re going along at one level, we hire someone, and we step up. We go along at this level until we hire another employee and we step up again. So how do you know if you can afford to keep climbing?
Set Aside 3 Months Pay
Profit First can help you prepare for the extra payroll costs. Specifically, for a 3-month period, set aside the cash that you’ll need to pay a new person before you hire them. For example, you’re thinking of hiring someone and you’re going to pay them $15 an hour to work part-time. Start putting that money aside into a payroll account as part of your Profit First allocations twice a month. In this example $15 * 20 hours (part-time) * 2 weeks = 600 plus an extra 10% for payroll taxes = $660.
So twice a month as you receive your payouts and you start doing your allocations, add an extra $660 for this new employee and move that money into the payroll account. This reduces funds that would have gone into your Operating Expense bank account and you will have to make do in your operations without those funds. Using this approach, you are preparing to pay for that employee before you hire them. If you can operate for three months without having to pull those funds back out to pay for another expense, you are probably ready to hire.
Create a Cushion for the Curve
Of course, a new employee is not going to be fully productive right away. There won’t be an immediate boost in your income when you hire someone. There’s a learning curve they go through as they acclimate to their new duties. Not only is the new employee working less than full capacity, the person
training them is also going to have a temporary decrease in their contribution as well. These are added costs that eat at your business finances. The good news is that they are temporary, and you’ve prepared for it because you’ve set aside money for three months.
So, as your revenue suffers, you can pull from the funds set aside in the payroll account to pay your employees. You’re continuing to put money in there to pay them going forward and you also have the funds that were set aside that you can use to supplement the loss of revenue to cover the employee trainer.
Typically, the boost you were expecting will show up within three months, maybe sooner if you have a great training program and have made a good hiring decision. If you don’t see the employee coming along quickly, then be quick to fire. You can’t afford to have a long-term payroll drain on the business. As tough as it is, you are better off making that decision quickly. Decide what went wrong and fix it, before you begin again to set funds aside for your next resource.
If you’re not sure you’re ready to take the next step, we offer consulting that will help you better understand your financial position. If you’ve already taken the steps and your business is quickly growing, we can help keep the books straight for you. Reach out to the bookskeep team today!
Interested in Profit First?
If your ecommerce business isn’t where you’d like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers. It answers important questions about how to implement Profit First in an ecommerce business. Take control of your money and your business, and put Profit First to work for you!
You can also sign up for the Profit First for Ecommerce Sellers Online Course. As a Mastery Level, Certified Profit First Professional, I will teach you why Profit First works so well for ecommerce businesses and the particular challenges for businesses that have physical products requiring inventory management. You will learn how your behavior drives your money management habits for your business and how you can set up your business bank accounts to work with your habits.
Check out all our ecommerce accounting and profit advising services here!
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