Entrepreneurs are always suffering from having too many tasks to do and not enough time. Adding people to your team seems like the solution. If I add more people, they can take some of this work off my back and I (the owner/entrepreneur) can move on to higher-level work and get to see my wife and kids.
Why wouldn’t you hire some people to help?
The problem with hiring more people is that we get in a hurry. We have a burning need for more help and will do anything to justify the hire. In that situation, we often hire the wrong people or fail to integrate them into the business so they can generate good returns on the salary you pay them.
We often fail to measure the true cost of the new hire. We all know we need to add burden (taxes, benefits, etc.) to the new hire’s salary. What we often miss is the impact a new hire has on the bottom line.
As the leader of the organization your job is to bring profit to the bottom line. That profit drives cash flow and the cash flow drives the value of the business and returns to your shareholders.
Let’s look at an example business to determine the impact a new hire has on the bottom line. You own and manage Acme Service Co. Your revenues are $5 million, with gross profit margins of 49% and net income of 10.3%.
Acme is a healthy business, but you are feeling the pressure of trying to be the CEO, CFO and head of sales all at the same time. You believe you could get a great candidate in to help for $100,000 in salary. If you add the new team member at $100,000 your net income margin will drop from 10.3% to 7.81%. You think that is not too bad and you are sure you’ll be able to make up the difference with your renewed focus and extra bandwidth.
Two problems just occurred. First, your operating income dropped from $650,000 to $525,000. At a 5x multiple, the value of the business dropped $625,000. That number disturbs you a bit, but you are sure you can get that back and more with the help of your new hire. The second problem is you’ll have to increase gross revenue $581,000 to get back to a 10.3% net margin. That is a big increase. How long will it take?
Now that you understand how much a $100,000 hire costs the business, you might be interested in other options. What could you do that would lessen the impact on the business?
Here are five options you can try.
• Squeeze the Lemon – How could you generate the extra $581,000 of revenue before making the hire? Let the reality of the total cost of a new hire drive creativity.
• Delegate – What tasks could you systemize and automate so a lower level hire could do them?
• Eliminate Tasks – Get with your team and host a stop doing party. Give a prize to the idea that gets implemented. Bureaucracy creeps into all organizations over time. What are you and your team doing that brings little value to the organization? Stop doing that task and reinvest the time and energy elsewhere.
• Create time by eliminating problems at the source. The problem could be defects or customer or employee churn. All of them can cripple your organization and use up valuable resources. Find the root cause of the problem by asking “Why” 5 times. Ask why the problem is happening and keep asking why until you’ve found the root cause. The fix is probably a lot easier than you expected.
• Outsource – If a task is not a core competency that builds your competitive advantage, consider outsourcing it. The business world is getting more and more complicated and we often need specialists to get the work done right and efficiently. Thankfully, our world is flatter than ever. You can hire a specialist from anywhere in the world and work with them as if they are down the hall. Look into online job boards like Fiverr, Upwork and LinkedIn to find the specialists you need.
I hope one or two of the ideas above will buy you some time before you must make that new hire. Hopefully, you will have already improved your revenue and margins so you know you can afford your new employee when you must make the hire.
If you’d like some great resources to help you on your entrepreneurial journey you can find them on our resources page at www.valuesdrivenresults.com or call me at 229.244.1559.
Curt Fowler is President of Fowler & Company and Director at Fowler, Holley, Rambo & Stalvey. He is dedicated to helping leaders create and achieve a compelling vision for their organizations.
Curt is a syndicated business writer, keynote speaker and business advisor. He has an MBA in Strategy and Entrepreneurship from the Kellogg School, is a CPA, and a pretty good guy as defined by his wife and four children.