Hiring a first employee can mark an exciting milestone in the growth of a new business. It is usually and indicator that the business is in demand and needs to be able to do more.
Taking on a new employee can be a large financial commitment and the timing for taking on the additional cost may not always line up with when an entrepreneurship feels they need to help of a new employee.
The following three questions are important for analysing the decision to grow by adding more workers.
- What is the impact on cash?
Understanding the affordability of the new worker is the most important factor. The expenses include not only the salary or wage, but also mandatory costs such as:
- Employment Insurance premiums
- Canada Pension Plan contributions
- Workplace Safety and Insurance Board premiums.
An employee can bring new capabilities to the business that make these costs worthwhile, but underestimating the price could lead to a serious cash flow problem.
Tip: Consider building a model for the expanded business using a cash flow projection worksheet to see how the business’s overall expenses change.
- What is the impact on the company’s capacity?
The most worthwhile expansion will be one that allows the business to make more money. If the new employee will produce a product or deliver services to customers, the impact on the number of units of a product produced or service jobs that can be completed is likely clear.
A new administrative or technical resource might be harder to measure. The impact on capacity could be the result of giving the worker a job that would have previously been done by the owner, freeing up the owner to make more product or deliver more service. The decision to add an employee will be easier if it can be justified specifically by knowing how much more work the business will do as a result of the expansion.
Tip: Consider adding the increased potential for sales into the cash flow projection worksheet mentioned earlier to see how the business’s overall potential for profit will change.
- Does the business have a system to support the worker?
Preparing for a first hire can be tricky. It is likely that the entrepreneur wants to hire someone because they personally feel overworked; however the entrepreneur has been able to “make it up” to this point regarding how work gets done. They have never been forced to give instructions or write a procedure for themselves or others to follow. Having a plan to provide training, predictable administrative procedures, and defining clear expectations will set a new employee up for success.
Tip: Consider writing a draft of an operational manual for the new worker. If you don’t have time to write a manual, you probably don’t have time to support the new employee in their first few weeks of work.
Hiring an employee is a great way to increase the productivity of your business, impact the economy, and grow to achieve a bigger, better profit. Analysing if the time and money is right for growing will make the decision easier and reduce the risk of expanding too soon.
The consultants at the Halton Region Small Business Centre provide free advice on building financial projection worksheets as a business changes, and on the rules, regulation and other considerations for hiring your first employee.