When to Hire Your First Employee

September 13, 2018

 

Q: I have a small business that has been open for about two years. The business has been growing and I’ve been thinking that it may be time to hire my first employee, but I’m not sure. How will I know when the time is right?

 

A: We congratulate you on the success of your business. Many don’t make it to the two year point. Hiring your first employee is a big step. Many entrepreneurs struggle with when to pull the trigger. The short answer is that you should hire your first employee when the incremental cost is justified by any combination of three items: increased revenue, lower expense, and reduced workload for you.

 

In order to make this assessment, you’ll need to understand four things.

 

  • The true cost of your first employee – Make no mistake, hiring your first employee will be expensive. To be sure, a large portion of the cost will be compensation. You can mitigate this portion of the expense by hiring a part-time person, rather than full-time employee. However, the cost of your first employee goes well beyond the paychecks you’ll write.

 

You’ll have to spend time and effort to complete the hiring process and then to manage the employee once he/she is on-board. You may need to purchase new equipment (for example, a computer, desk, chair, etc.). New office space may be required. Not insignificantly, your business will become subject to a plethora of new regulations and taxes. We have had employees for years and can attest that this burden is not inconsequential. Complying will take both time and money. Take all of the above factors into account when assessing the cost of your first employee.

 

  • Additional revenue you will be able to generate – Your new employee may bring in revenue by selling. She/he may increase your capacity to deliver a product or service that fills existing demand. Perhaps the new employee will simply relieve you of administrative duties that will allow you more time to sell and deliver your product or service. Each of these activities will bring incremental revenue to your firm. Estimate the additional revenue that the new employee will enable your firm to generate. Subtract from this revenue any resulting increase in variable cost to calculate the benefit it will bring.

 

  • Expenses you will be able to reduce – Your new employee will surely increase certain costs. However, he/she may also enable you to reduce certain expenses. For example, your new employee may perform functions that were previously outsourced reducing what you pay to these outside vendors. Factor any such cost reductions into your calculation of the net benefit of the new employee.

 

  • The personal benefit of a reduced workload – The three items above are all quantifiable (although admittedly, some will be estimates). You can run the numbers and determine if hiring your first employee will represent a net increase or decrease to your bottom line. If the result is more profit, the decision is easy—proceed with hiring your first employee. 

 

However, even if your new employee is a modest net drain on the bottom line, making your first hire may be a good decision if it gives you, at least, some of your life back. Remember, in the long run, working at a pace that is sustainable for you and your family is critical.

 

Hiring your first employee is a big decision, but, at some point, you’ll have to do it if your business is to grow. First, run the numbers to quantify the expected change to your bottom line. If the change is positive, start the hiring process. Even if you expect the change to be a slight reduction in profit, it may be justified if it improves your work-life balance.

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