So you want to hire your first employee?
That’s the BEST problem you can have in business… to have so much work and new clients that you’ve decided that it’s time for you to bring on an employee to grow and scale your business.
But how do you approach hiring your first employee? It’s a HUGE decision, so you need to make sure you’re prepared for what’s next.
In this post and video, I’ll share with you my perspective on how to approach hiring employees. I’ll also share two quantitative-based hiring frameworks to help you decide if you’re ready to hire an employee or not from a numbers perspective.
Expanded Video Transcription
You’ve probably thought long and hard about hiring your first employee. Maybe it’s a good idea, but you’re not sure.
You might be unsure whether or not you have enough cash flow to hire your first employee. By cash flow, I mean whether you have enough cash in the bank to pay your employee’s salary every two weeks.
You might have all kinds of ideas about how to pay your employees on time, what payroll software to use, and how the whole relationship will work. I went through the same experience and had the same questions when I first started thinking about growing my agency business.
Before hiring an employee, consider a business partnership instead
To be honest, I wasn’t ready for employees the first time I became an entrepreneur. In my case, rather than hiring employees, I joined another company, Three Deep Marketing, where I became an owner and an employee of that business. Three Deep had a lot of the infrastructure in place to grow and scale, so instead of starting from scratch, I found business partners who had the same goals and ambitions to grow an agency. I didn’t want to deal with the hiring process, and I thought there was strength in working with another company.
If you don’t want to hire employees on your own, consider taking on a business partner instead. That is a valid choice for getting started and may carry less risk in the short term. I don’t have regrets about joining forces with another company and becoming an agency partner. I understand the reason why you might not want to bring on a business partner, or maybe that offer is not on the table for you. So you might want to persist down the path and hire employees instead.
The Difference Between Paying Yourself and Employees
The #1 consideration when hiring employees is making sure that you have enough cash in the bank to make payroll into the future. Think about cash from this perspective: at first, you only get paid when your clients pay you. This can be inconsistent and you might go months in between payments.
You might pay yourself a salary every two weeks like you did when you had a job, but most freelancers, small consultancies, or one-person agencies pay themselves whenever the money comes in. There could be months where we make zero money.
I’ve had months like that myself, but there are also months where I earned $10,000 or $30,000, and I could pay myself a significant portion of that as the owner of the business – as the number one employee. That’s okay when you’re doing it by yourself, but it’s not something that works out well when you’re paying employees.
An employee expects a paycheck every two weeks, and they are expecting health insurance and other benefits as well. Expect all kinds of different needs when it comes to having employees. It’s not the same as just paying yourself whenever the money comes in. You have to be able to pay an employee salary every two weeks.
You have to view hiring employees as a long-term business investment.
Hiring An Employee is a Long-Term Investment
Think about hiring employees as a six-month or twelve-month investment in your business. This is quite different than hiring a month-to-month contractor.
Before hiring, answer critical questions like:
- What’s the salary that you need to pay somebody plus benefits?
- What’s the total amount of money you are on the hook for paying somebody if they become an employee?
There are two hiring frameworks I recommend to help you answer the two questions above. The cash-flow employee hiring framework and the revenue-per-headcount hiring framework.
The Cash-Flow Employee Hiring Framework
One framework to use in deciding whether or not to hire an employee is projecting your cash-flow over a period of months. You might do a cash flow projection of six-months in order to decide whether or not you can afford to bring on an employee. If you do this, I recommend that you budget DOUBLE your employee’s salary for this same period of time.
For example, if a potential employee is requesting $5,000 dollars in salary per month, I would budget $10,000 dollars per month to have enough cash-flow for both the employee and their benefits. If you’re a risk-oriented person or if you are not worried about cash-flow, you might decide to hire an employee knowing that at the end of the month you’re going to make that money in salary back.
But if you’re more conservative, you might adjust your cash-flow runway to three months instead, to have a buffer of when you know for sure you have enough cash to pay for an employee.
Personally, I’m so conservative that I like to budget six months of cash-flow for a new employee so that I’m 100% certain I can afford to pay them before hiring that employee.
Some business owners budget 12-months of cash-flow, which means a year of stability in the bank. There is minimal risk when you have a whole year to make that salary back. Generally speaking, the longer your cash-flow runway, the less risk is involved with bringing on that employee. The shorter the cash-flow runway, the more risk you take on. This means quicker onboarding, but you’re also taking on more risk.
Onboarding a new employee fast can help your business grow much more quickly, because you’re bringing that employee on after month one as opposed to 12 months later. It’s important to weigh that balance to decide what is best for your business.
Do you have the cash to hire an employee, or do you need to go out and get the cash from another source?
Think about the cost placed on that cash. What does that funding cost your business in terms of interest rates, stock equity, and missed business opportunities?
The Revenue-Per Headcount Hiring Framework
The second framework you can use to help you decide whether or not to hire an employee is the revenue-per-headcount framework. This is a calculation that I’ve relied upon for years.
This framework works under the assumption that you need to have a certain amount of revenue generated per person in your business to turn a profit. For example, you might determine that $100,000 in revenue per junior employee is what you need to turn a profit. Or if you have a senior work staff, you might choose a higher number like $200,000 in revenue per employee.
In countries like the United States where the cost of living is higher, your revenue per headcount needs to take that into account.
Why Agencies Hire Employees
The reason freelancers, consultants, or one-person agencies consider hiring employees is because they recognize that there is a cap on what they can earn as individuals.
We can only take on so many clients. We can only do so much work. There’s only so many things we can accomplish with the time we have. That means you will probably find that your income gets capped as a result of being a one-person business.
The purpose of hiring an employee is to help you do more work and add more value to your clients. Most likely, any employee you bring on is going to be paid less money than what you pay yourself. But this depends on how long you’ve been in business, and your cash flow situation.
But the point remains: if you want to grow your business beyond a certain point, you need to hire people.
Hiring the right people for your team can be a major profit generator. In a service-based business, it can also help you diversify your revenue sources by taking on more, bigger projects.
If you want to generate big profits – or you want to generate revenue in the $500,000 to $1 million plus dollar range, then you are probably going to need to hire employees. Or you can do what I did, and join forces with another business.
The last thing to keep in mind: What role should you hire for?
The obvious answer is to hire someone to help you with business development. Or someone who can free your time up from the day-to-day tasks so that you can focus on business development.
Remember, hiring somebody is supposed to be a 1+1 = 3 scenario. Hiring an employee or getting a business partner should lead to 3x the amount of revenue generated than you would gain on your own.
If you can reach this goal, then you’re sitting pretty in your business. When you consider bringing on an employee, think about what they can do for your business. Or, think about what they can take off your plate, so you can go and improve your business.
- Before hiring an employee, consider getting a business partner who might already have the infrastructure to grow and scale an agency business.
- Hiring an employee is a long-term investment – make sure you have the cash-flow to support it.
- Consider using The Cash-Flow Hiring Framework or Revenue Per Headcount Hiring Framework to help you decide when to hire an employee.
- I personally use the Revenue Per Headcount Hiring Framework whenever I hire an employee.
- Remember, hiring an employee or getting a business partner should be a 1 + 1 = 3 scenario where you aim for 3x the results of doing things alone.
How do you approach hiring an employee? What sticking points do you have when it comes to hiring? Leave a comment to let us know.