When to Add The Next Employee
By Gary Cohen
I started my business 6 years ago and have grown to employ four people. When I hired them there was adequate money thrown off from the business to do so, thus, the decision to add them and grow the business was a no brainier. After 6 years I am finally drawing the salary I desired, and feel is well deserved, especially considering the hard work and excessive hours that brought me to this point in time. The thing is, my business has stopped growing and does not throw off extra cash to comfortably add another employee. I feel I need another person to grow the business, but fear the financial risk taking. Should I add the employee?
Questions to ask?
Let's take this issue to 50,000 feet and ask: Are you convinced you want to grow the business? Will the business become profitable by adding an additional employee? How long will it take to get a return from adding an additional person?
Now drop to a 10,000 foot level and ask: Why don't I generate enough profit currently to grow to the next level? Am I taking too much compensation from the company at this time? Where do I want to go with the business?
Coming to ground level with those strategic questions answered, should provide you a broader basis for planning and greater clarity. Let's look at three options to consider:
- Stay put. If you dislike taking a higher level of risk you may choose to keep the company small, work longer hours, and perhaps maintain, or even increase your current level of compensation, without any internal changes. Often entrepreneurs will go into locomotion heading toward accelerated growth, finding when they arrive that they do not like the tasks that come with the territory, or the business of managing other people after all. Their joy comes instead, from their own personal expertise and individual contributions. Knowing clearly what it is you want is essential to making the proper, satisfying choice. Staying small is an option to consider.
- Delay timing while you increase your effort short term. Fortunitly you will not lose as much compensation, if any at all, in fact, some areas could improve. More will be learned about possibilities thus lowering jeopardy potential. If you ask, "Is it time…" Exhaustion is likely setting in or momentum propelling you forward because the demand for your product or services has you against the wall. If you think there is something that can change, a large event that could catapult you further wait for it to occur, making the transition less precarious. Remember, if you don't change something in the system – your situation will most likely remain constant.
- Add an employee to accelerate growth.
If you cannot produce what is being sold currently, adding personnel in production should allow the company to generate the additional revenue immediately and likely cover the cost of the new employee.
If a sales person is added the potential revenue created by him/her will increase proportionately to their skill level and the richness of their designated territory. It may or may not begin at once, but with time, familiarity of product and customers, increased revenues can be anticipated.
An entrepreneur characteristically sells the product or service first, then harvests it. Over time the entrepreneur will begin to sell more than he/she can harvest. This point is commonly referred to as a plateau. Not to worry, all businesses hit plateaus. This is when the systems, processes, people and or resources are not well organized. It is likely that the reason you do not have the resources needed to hire the next position is that they are directed to your own compensation. Who can blame you – at this point you are probably working 12 to 14 hours a day to keep up with the demand of your product or service.
Working less is around the corner. Often, short term current payoffs feel so seductive; we don't examine the benefits of paying the cost today for a better tomorrow. For many entrepreneurs it is the vision of life after success that keeps them running like an Ever Ready Bunny. My neighbor uses the line, "It only took you 20 years to become an overnight success." When people look at others in the community they only see them in a moment of time, not seeing the sacrifices that were surrendered to have built a large enterprise. You already have broken the difficult odds against starting up a small business, and should pat yourself on the back for your smarts and tenacity. The vast majority of businesses fail long before their sixth year. The deal is that at each one of these plateaus, entrepreneurs must sacrifice additional "blood" to reach the Promised Land.
Three options to fund this new position are:
- Reduce your own compensation until the added employee begins to pay for themselves. This will definitely feel like a set back unless you look at it as an investment.
- Can you use a line of credit with your bank? Remember most banks give you the line to fund receivables not add new staff that will generate negative cash flow. This option adds greater risk to your enterprise if the employee does not pay for him/herself immediately.
- Sometimes growth can be funded by slow paying vendors and finding ways to collect from clients faster. This can give you more cash to work with and you will not have to pay interest at the bank.
If your decision is to grow the business and everyone is working flat out I would go for the new hire and fund it by cutting back on my own compensation while managing payables and receivables more closely.
