Earning enough to take on an employee

[Atom London]

Hi all,

I'm a sole trader and have a successful enough business to earn a living but I'm wanting to grow enough to hire staff instead of using freelancers. This is probably a typical small business issue but I'm stuck between taking on new work ( which would bring in more income) and having enough resources (my time) to provide services to my current clients without being stretched too thin.
At what point have you bitten the bullet and taken on staff? I don't particularly want to take out a loan or use my property to raise finance to cover a salary. Is it just a matter of faith that the potential extra client base will cover the extra salary or is there some kind of rule of thumb calculation? Any advice?

 

[pentel]

This is an ideal question for some analysis. Create a profitability and cash flow spread sheet covering at least a year. This should show you should show you the monthly ( or weekly) cash situation and also maximum negative cash flow position. Then modify assumptions such as slower customer increases than expected, no customer increases, higher customer increases, cost changes, price changes. change of payment terms for both customers and suppliers, etc.

If you are determined to no not take out a loan then you need to get yourself to a point where you have the cash to cover the maximum negative cash flow position.... and preferably a chunk more!

There is then the implementation of the plan. Again the spreadsheet you created will be a great help. Check that you are on track on a monthly (or weekly) basis. If better than expected or worse than expected then why? Use this to review your plans. If its all good or better than expected then great, if not then change what you are doing... or stop!

 

[bodgitt&scarperLTD]

Half of it is crossing your fingers and having faith that the potential extra client base is indeed there, and the other half is ensuring that you charge enough to actually make profit after the costs of employing.

As a really, really rough rule of thumb, your employees should be bringing in hourly at least 2.5-3x their headline hourly rate. So if you're not currently charging that, the first step before employing is to up your rates to that. If clients drop out, who cares? Replace them with these potential new clients, who will pay. Then, once you have a full diary again and others asking for your services, consider employing.

Once you have an employee, delegate absoloutely everything that you can without compromising on quality of service, and spend your time sourcing new work and handling customer relations/invoicing.

Something that isn't apparent until your employ is how quickly you can grow once you can delegate. Many become unstuck here, and grow too big too fast. I see it all the time in the construction industry- a yard full of shiny diggers on finance and twenty men and vans. Next month, gone bust, started again with a second hand digger and the two best blokes, leaving the other 18 calling around asking if anyone has any work.

Focus upon organic, word of mouth growth based upon good service at rates that allow you to make a profit. Winning work on price to keep a team busy so you can act the big man (or woman) has been the cause of many bankruptcies and worse (divorce)

I see from your website that you are in location based IT support. I think you would be pleasantly surprised if you took a bright young person on as an employee (let's face it, there will be no shortage of IT literate youngsters in London who would rather work for you than McDonalds). You should have no trouble achieving the required hourly rate multiple without pricing yourself out or screwing your employee.

Be prepared to 'hire and fire' until you find the right one, and watch out for employees trying to poach customers for private work. A young person with the right attitude will mitigate against this, and the relationship could work well for the both of you.

 

[WaveJumper]

Very good advice above and very sensible reference the don't be afraid of delegating work to free up your time to grow the business. My advice for what its worth is when looking for that person don't settle on the "best" of a "worse" bunch keep looking until you find the right person to fill the role. and on that note be clear on what that role is ......ie create yourself a job description.

 

[pentel]

As a really, really rough rule of thumb, your employees should be bringing in hourly at least 2.5-3x their headline hourly rate.

This is a decent suggestion. By the time you have added NI, pension, holiday pay and the cost of your supervision you should hopefully come out with a profit.

Please be aware of starting someone at a low wage, using this rule and then being stuck between a rock and a hard place when you substantially increase their wages.

 

[Atom London]

Thank you all for taking the time to post your useful advice.
Analysing my profitability and cash flow is a sound start. Once I've gotten data backed evidence I'll have a clearer idea of whether I'm charging enough to begin with and what leeway I have financially. Growing from a one man band is quite daunting as I'm essentially a craftsman having to become a business owner - I've been overwhelmed every time I've considered where to start with it all, esp the thought of being responsible for other people if I take on staff.

 

[MBE2017]

Once you have an employee, delegate absoloutely everything that you can without compromising on quality of service, and spend your time sourcing new work and handling customer relations/invoicing.

Something that isn't apparent until your employ is how quickly you can grow once you can delegate.

Excellent advice, and something most people taking on staff find very hard to do, since YOU obviously will be able to do the work better, however you have to learn to allow them to do the work, freeing you up to do more important tasks.

It sounds so easy in a post on a forum, it is possibly the hardest challenge in real life you will face to grow your business, I struggled early in my career to delegate, to the point I would be working 15/20 hour days, but only getting paid for eight hours.

As for the calculation on business required to justify a hire, it differs industry to industry. The last time I hired a rep, although his salary was £18k pa, allowing for the company car, pension etc, I worked out he would be required to bring in £60k of business per month. I chose not to hire since no rep in the country of a national chain was achieving that figure and changed the role to an office based telesales position instead.

Half the salary, only £20k per month required in new business, £100k achieved. National management were not happy until they saw the figures, sometimes the traditional ways do not work as well as new methods.

 

[bodgitt&scarperLTD]

Thank you all for taking the time to post your useful advice.
Analysing my profitability and cash flow is a sound start. Once I've gotten data backed evidence I'll have a clearer idea of whether I'm charging enough to begin with and what leeway I have financially. Growing from a one man band is quite daunting as I'm essentially a craftsman having to become a business owner - I've been overwhelmed every time I've considered where to start with it all, esp the thought of being responsible for other people if I take on staff.

Your ideal employee is as follows. Young, bright, possibly smart enough to be not sure if they want to go to Uni (cost/benefit analysis in their mind) As you are London based driving isn't an issue, which is a major hurdle for empoyers in other trades.

They will not necessarily be from a 'good' home, possibly a little introverted (but not too much, just enough that all they need is 'bringing out of their shell') and probably slightly geeky (it's IT after all). This type of person, if they are treated right (paid above the minimum wage for a 17/18 year old, treated as part of a 'family' business, and given encouragement and support in both their professional and social development, can become an extremely loyal and valuable member of a team.

Your profession and the phenotype of a worker that I think you require align well. You are lucky. Honestly, you've no idea how galling it is to have to deal with 17 year olds who spend their weekends getting hammered and stoned, turn up late on a Monday, and all they can manage when replying to a job advert is a text saying 'wots the day rate m8?'

I think you should just go for it. You don't have to take someone on full time, a young person is quite likely to be part time anyway, and you can build it up as you go. If you can't make a go of it within two years (and I'm sure you can), then you can let them go without any repercussions anyhow.

 

[Atom London]

This type of person, if they are treated right (paid above the minimum wage for a 17/18 year old, treated as part of a 'family' business, and given encouragement and support in both their professional and social development, can become an extremely loyal and valuable member of a team.

Yes that - there are so many young people in my area that could do with a chance, that's my hope, that I can help someone get that step up into work.

 

[Paul Kelly ICHYB]

Why take out a loan to pay staff? They should be covering their costs when they land!

Get the business/clients to cover their costs, then employ someone.

Or outsource certain parts to a third party until you have the turnover to cover the costs...

 

[Paul FilmMaker]

I'm in a similar situation in video production. I have three different solutions.

Firstly, I have contractors I use for specific projects, secondly, a part-timer who is happy with a bit of work because they are incredibly good but semi-retired and finally, people for 6 months or so on a full time basis.

The best is the part-timer who is fantastically good at what they do, absolutely superb in front of customers but they don't want more than a part-time role because they're semi-retired. They're in their 50s, have made enough that they don't really need to work but still enjoy working when it's part-time, not full time. They are brilliant and my only challenge is they have more money than me and drive a seriously fancy car which causes a few double-takes from customers!

 

[Paul Norman]

I took on staff before I needed them, and gave myself the challenge of selling additional stuff to pay their wages. It did, of course, mean I had to effectively underwrte their costs whilst we did that.

But in the long term, this has a lot of benefits, if you can manage it. Not least of all was I could train them up before they were fully required.