Knowing when you can hire is a major challenge for startups to navigate. Getting the right balance can make or break your business.
Wages, employee benefit and payroll taxes are often the biggest cost of doing business. And you need to time your hires very carefully to avoid hamstringing your growth.
If you pull the trigger too soon, your cash flows might not be able to support the sudden spike in costs. Your new employees will sit idle and all you’ll end up with is the hassle of managing them.
But if you hire too late, you might find yourself turning away business and limiting your revenues. Or even worse, taking on more work than you can handle and drowning in a sea of demand.
Fortunately, if you rely on hard data to help time your decision, you’ll be able to walk that line with confidence. This article will cover everything you need to know to grow your team, revenues and business in sync.
Time to dive in.
Reach a Stable Growth Trajectory
In general, you should only hire employees when the work they’ll be doing does (or eventually will) reliably generate income that exceeds the costs to employ them.
For a tech or SaaS startup that requires extensive in-house product development, that might be very early on. But all expensive upfront investments should be approached with caution. And employees are an investment like any other. You need to know that they can provide a return before you pay for them.
That’s why you want to avoid unnecessary hiring when you only have a few months of inconsistent financial data available. You have no idea what kind of return those employees will bring.
First, you should get your business to a stable phase of growth, with predictable cash flows that you can easily project over the coming months.
Here are some key markers of a stable business trajectory:
- Identifiable Growth Drivers: Growth drivers are the key activities or assets that propel the bulk of your operations forward. This might be the number of cold pitches sent, traffic referred to your websit, or your paid advertising. If you can track the scalability of your revenue to a handful of drivers, it’ll be easier to predict your growth over time.
- Consistent Revenue Growth: Revenue is often among the first metrics used to gauge the success of a business. The gross number is useful at a glance, but its growth over time is the real measure of a business’s direction. You’ll need to have a steady and predictable revenue pattern before you can make meaningful financial models of the future.
- Healthy Marketing and Conversion Metrics: The early phases of a business are all about gaining traction. Startups in particular are defined by their ability to grow rapidly, and that usually requires aggressive marketing tactics. Pay attention to your lead. generation and close rates in particular. If you’re a SaaS provider, focus on leveling off your churn rate, click-through rate and conversion rate.
A steadily growing company is a necessary but not sufficient justification for hiring employees. Next, let’s take a look at how to use your financial data to predict when you will need those new hires.
Project Future Growth at Your Current Capacity
Once your company has reached a comfortable level of stability, use your historical data and plans for the future to project your growth over the coming months at existing capacity.
Note: If/when you enter the “growth phase” hiring will likely speed up. Getting your process down in the first few hires will make mass onboarding easier.
Hopefully, your model will show your sales volume, profits and cash reserves steadily marching upward. But every business has its limit (especially one without many employees). And your projections should show that eventually you’ll reach yours.
If you’re providing a service, that might be when you can’t fit any more client-facing hours into the week. If you’re offering a product, that could be when you can’t keep up with the necessary sales work. A SaaS company might find that they’ll be unable to keep up with ongoing customer support.
Of course, financial models are never perfect, so you should be consistently comparing your actual results to your budgets and refining your projections as you go.
But eventually, your business’s growth will begin to approach a plateau. That’s when you’ll need to consider looking to hire.
What Your Hiring Period Should Look Like
Generally, it takes about a month to attract and hire the right talent for your business. Because of that inherent lead time, you should start your search at least two to three months ahead of when you predict you’ll need assistance.
It pays to err on the side of caution. And you’ll also have to train your employees before they can start contributing to your bottom line.
Of course, there will be some variability depending on your industry, your location and the type of employee you’re looking for.
For our intents and purposes, there are only two types of employees: those that directly create revenue and those that support them. If your business is still growing aggressively, you’ll want to prioritize the former.
So don’t just look for general assistance, hire employees that will specifically contribute to the growth driver that’s causing your business to plateau.
It’ll be simple to recognize the moment you need to hire them if you focus your attention on these metrics:
- Cash Flows and Reserves: In the first few months of employment, it’s unlikely that your new hires will be operating at full capacity. You’ll need to have set aside enough to pay their salaries while they’re being trained. Ideally, you should be able to pay for their wages out of pocket until they become fully functioning assets. But at the very least, you should be able to cover them with your monthly cash flows.
- Revenue per Employee: To make any hire worth it, they’ll need to bring in more revenue than it costs to employ them. If you have a smaller business with few employees (maybe it’s just you right now), it should be easy to gauge how much of an increase in revenue you can expect from each new employee. Wait to hire until that increase exceeds the market salary for that position.
- Company Capacity: Capacity is the maximum level of output that a company can sustain, whether that’s creating products or providing services. The ideal point to hire is just before you’ve reached your capacity. That way you’ll have found, hired and trained your new employees exactly when you need them most.
Your Next Steps
Bringing on new team members is often a decision made in the heat of the moment based on a business owner’s feelings or instincts. It occurs to them that they’ll need to bring on additional help at some point.
And that sits in the back of their mind until a lull in client work inspires them to action.
But that moment is likely to be either much too early or far too late, which can have devastating repercussions for your business. You should be planning the hiring decision far in advance and with a scientific approach.
That’s why the data-driven strategies we’ve outlined above are the key to timing your hiring decision correctly.
If you’d like more assistance incorporating data into your business decisions, Pasquesi can help.
We offer fully outsourced CFO services, strategic tax planning and much more. Feel free to read all about the ways we can help you, or just reach out to get started.