Business is great. You are so busy that you’ve been burning the candle at both ends just to keep up with all of the new orders coming in. The best way to describe you at this moment is happy, but utterly exhausted.
You were already asleep before your head hit the pillow last night, and you immediately started dreaming about your business with a new employee on the payroll. In your dream, you start working more reasonable hours again and have help with those pesky administrative tasks piling up. This new hire is also a master bookkeeper, which makes you smile because you hate taking care of the books. When a customer walks in the door, your employee smiles and greets them warmly, immediately presenting the perfect sales pitch. They make sale after sale in between their paperwork and basic office management tasks. In this dream-version of your business, you are walking to your desk, but decide to turn around and say thank you to your new employee. When you do, they are standing there in a full body unicorn outfit, leaping around the office.
Then you wake up.
Unless you have a fear of unicorns, I hope this dream made you laugh. But in reality, it’s not far off from what most business owners want to have when hiring one of their first employees. As business grows, entrepreneurs contemplate hiring more help to lessen their own workload, while also taking on more clients. They often want an employee that is a master of all tasks, works more efficiently than artificial intelligence, and…doesn’t exist in real life. In other words, a leaping unicorn!
One of my hidden talents is leaping unicorn radar – I help business leaders identify when they are chasing leaping unicorns and provide realistic solutions for their hiring needs. As a Fractional CFO, I can help you determine if your business can afford to hire, when, and what job responsibilities make sense. Contact me today for my financial formula for successful hiring!
Questions to Ask Before Hiring Help
While your leaping unicorn may not be in the pool of applicants, you can hire help that will grow your business and serve as a catalyst to boost your bottom line.
First, though, every wise business owner needs to determine whether this is the right time to hire and if they can afford it.
To begin figuring that out, there are a few key questions that need answering:
- Who is currently doing those tasks that the new hire will do? And what is the best use of that person’s time? Maybe you are doing both sales and bookkeeping, but you are not trained in bookkeeping – sales is your forte. That is a clear indication that you should be hiring for bookkeeping, not sales, so they can take that off your plate.
- How solid is your cash flow? You should be seeing your cash flow increase regularly, and be operating “in the black” with net income each month, to support the cost of a new employee. If one of those is not healthy, then you should wait.
- How will this new employee add to the bottom line? You will have an additional expense after hiring a new employee, so it’s critical for you to answer this question. It’s easy to answer if you are hiring a salesperson that would bring in more sales. It’s not so easy to answer if you are hiring a bookkeeper or office manager. But, don’t forget that a hire that is freeing up time so that others/you can spend more time on sales, is equally adding to sales (indirectly).
- Can you hire a part-time employee instead of a full-time one? Many business owners immediately jump to needing full-time help, but that isn’t always the best decision. Many people are looking for part-time positions (stay at home parents, college students, etc.) and hiring part-time is a great way to ease into making the decision to hire help. This role might grow over time as your needs grow, but you can always start with part-time and hire full-time later.
- What is the true cost of a new employee? Once you determine an hourly rate, you should add in a buffer of 20% to pay for payroll taxes, workers compensation insurance, and other employee costs (make that 30% for workers eligible for insurance benefits). It’s easy to forget that the cost of an employee is more than just their salary.
Once you have this number, you can look at the cost more directly. Take the hourly rate, multiply by 1.2, then multiply again by the number of hours per month. That will give you the cost, per month, for the employee. Take that number and subtract it from last month’s net income (which approximates your net cash flow). Then repeat the calculation for each of the most recent 3 months to see how things would have been if you hired the employee.
Hourly rate X 1.2 X hours per month = monthly cost of employee
Monthly net income – monthly cost of employee = monthly net income left over
What is the resulting monthly net income from this equation? Is it still positive? If so, is it enough to run the business? If you aren’t sure, it’s time to call Huxley CPA and let us partner with you to confidently answer the question – is it time for you to hire an employee…and can you afford it?
Further Considerations For the Wise Business Owner
Once you’ve determined it’s the right time to hire (or to prepare for when it is time), check out these other important articles on critical hiring information:
- Employee Vs. Contractor | The Business Trap – There is no one single defining difference between an employee and contractor, as classification is situational. But misclassification can cause your business big penalties with the IRS. Make sure you know and understand the 3 big factors to consider when deciding if you should classify hired help as an employee or contractor.
- Mitigating Risk Through Hiring Best Practices: 6 Expert Tips – Mitigating risk through hiring best practices will save yourself from getting sued or having a big penalty from a government agency. Not implementing these basic steps from the beginning could cost you a lot of money in legal fees or with the IRS.
- Payroll Business Taxes – Aside from income taxes, there are three types of taxes every business owner should know about: payroll taxes, business property taxes, and sales tax. Payroll taxes are what matter here, as they are based on how much you pay your employees. These taxes go towards social security, medicare, and workers compensation (among other areas), and rates vary based on state, city, and sometimes even district.