“How will I know when I can afford to hire new employees?”
As entrepreneurs, this question can be difficult at times. Because of our entrepreneurship, we wear many different hats on a daily business. To create the business model we want, we need to be able to focus on the big picture; doing what only we can do as the business owner. In order to do that, we need to have others on our team doing what they do best in areas that we can delegate.
How Do You Know When You're Ready?
As a business owner, when will you know you are in a position to bring in that much-needed help? With the ebb and flow that is common in an ecommerce business, how will you know if you have the ability to pay another person consistently?
Even with the ebb and flow, most ecommerce businesses grow their income on a curve. If you're implementing Profit First in your business, while your income may start out low, it will grow at a steady pace because you have the processes in place to make that happen. If you drafted your income on a graph, you would see the upward progression of that curve.
Likewise, as you hire employees, you typically will see a step increase in your expenses. In other words, you're going along at one level, you hire someone and step up a level in related expenses. You go steady at this level until you hire your next employee, at which time you step up another level. So the question is how do you know if you can afford that next step up?
Set Aside Funds for 3 Months
The Profit First cash flow method is designed for this sort of planning! First, take a look at a three-month period and set aside the funds you think you will need to cover hiring and paying the person you want to hire.
For example, let’s say you were thinking about hiring a person part-time for $15 an hour. In a payroll account, start setting aside the funds as part of your Profit First allocations twice a month. In this example, the math would break down like this:
$15 (salary) x 20 hours (part-time) x 2 weeks = $600
(Don’t forget to add an extra 10% (or $60) for payroll taxes.)
Your total anticipated payroll expense will be $660 for a two-week period.
Twice a month for the next three months, when you receive your payouts and start your allocations, place an extra $660 in the payroll account for your new employee. It will reduce the funds that would have been in your Operating Expense account. This will be a good indicator of whether or not you are ready to take on a new employee.
With this approach, you will be prepared before even hiring a new employee, and if you can operate for three months without dipping back into those funds to pay for expenses, then you are ready to hire!
Be Prepared for the Learning Curve
Don't expect to see an immediate boost in your income after you hire a new employee. They aren't going to be fully productive and will need some time to acclimate to their new role. It takes time for the new employee to be trained and start working at full capacity. In addition, the person who is training that new employee will also be experiencing a temporary reduction in their contribution as well.
By default, these extra costs are going to reduce your finances. However, the good news is that this is only temporary, and because you have already prepared for it using the Profit First method, you will have already set aside enough money for the first three months.
As your revenue temporarily decreases, you can pay for your employees with the funds set aside earlier. Continue to put money into this account, so that you will have the right amount of funds to be able to pay the new employee and supplement the loss of revenue and cover the employee trainer.
Know When to Hire...and When to Fire
Hopefully, within three months of hiring the new employee, the boost to your business you were expecting will show up (potentially sooner if you made the right hiring decision and have an awesome training program).
However, if you don’t see the boost or if the person you hired is not performing correctly, fire them sooner rather than later. As difficult as it can be, you need to make the decision quickly. You can’t afford to keep draining the payroll, especially on a long-term basis. Figure out what went wrong and how to fix it quickly, so you can start setting aside the resources for your next great hire.
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 of our ecommerce accounting and profit advising services here!