Four critical keys you need to know to hire in any growth cycle.
Once you understand the economics behind hiring people in your company, it will increase your chances of creating accelerated exponential growth in your company.
No matter your company size, the single most significant expense is payroll. And yet the process is so cryptic. You will not find many resources online that give you a roadmap. Hiring the wrong person at the wrong time could be a disaster for your company. Research shows hiring the wrong person or hiring too early is one of the top five reasons for business failure.
To avoid this, you need a hiring plan. Here’s what you need to know:
#1 The “100,000 to 1” ratio.
According to the US Department of Commerce, “small businesses” hire one person for every $100,000 in sales. In other words, companies with seven employees generate $700k in sales, and companies with 70 employees generate $7M in sales.
#2 How to pay them.
This doesn’t mean hiring someone for $100k yearly for every $100k sale. By doing so, you’ll be operating at a loss for the foreseeable future. The US Department of Commerce states that the average US employee earns $68,000 annually. You will also need to factor in 20% for your share of payroll taxes (FICA) & benefits (health, disability & life insurance, 401k admin) so you’re paying:
$68,000 x (1+.20) = $81,600
If you wanted to lower this number, you could replace health insurance with a Health Savings Account (HSA) up to $5,000 annually and provide a bonus at a 5% cap ($3,400). Your share of FICA runs close to 3% ($2,040). It would look like this:
$68,000 + $5,000 + $3,400 +$2,040= $78,400.
If you’re a start-up, this kind of flexibility around compensation could be critical.
Starting, you would outsource critical roles or increase your ratio from $100,000 in sales to $150,000 in sales per hire to ensure you are competitive in your industry.
#3 Pay yourself.
The person you need to pay first is yourself.
Many business owners say they don’t pay themselves. Please stop with that. Venture capitalists pay themselves to find companies like yours to invest in. You should go ahead and pay yourself for creating the opportunity.
At the same time, you should be as prudent as possible when paying yourself. You will also need to invest in growing your business.
As the first hire of your own company, a recommended ratio should be 3:1.
In other words, whatever your salary should be, your sales should be three times that (3.0x). You need to earn $120,000 a year to pay your bills and maintain a personal financial plan; you will need to earn $360,000 in sales.
$120,000 x 3.0 = $360,000
#3 Who/when to hire.
Once you reach this milestone, you will need to start thinking about the parts of your business you don’t like to do that are critical to your growth, so you can focus on what you do best.
And here’s the best part: you should outsource as long as possible. The goal is to double your sales before making a key hire. You should outsource fulfillment and drop shipping if you’re selling a product. If you are a service-based company, you should outsource tech stack development and get a virtual assistant. Branding, social media marketing campaigns, and PR could also be outsourced in both business models to help drive the growth you need.
Imagine setting an annual budget of $100k to do everything that adds $200,000 in sales and revenue, putting your new yearly income at $560,000.
And to make sure all these moving parts work together cost-efficiently, you can outsource a CFO.
You’re now at a 5:1 hiring ratio, which could be considered scaling.
#4 “Small hire vs. Big hire.”
The biggest mistake many business owners make is hiring someone from a large corporation. This is considered a “big hire.” If you’re still in growth mode, you want to consider someone who can wear many hats and who will find the step up in title and added responsibility rewarding. This is a small hire. Someone from a big-name company who is used to big budgets and supported by a team of managers may not be a fit.
#4 Create a hiring grid.
You begin your hiring plan with a table. I create columns across a spreadsheet as follows:
From CEO to receptionist, list every employee needed to complete your company culture and offer the best customer experience.
Describe each position.
Proposed salary of each employee.
Taxes & benefits
These costs are estimated at 20% of the salary.
Bonuses & Commissions
If you plan to pay bonuses or commissions to certain roles, include them as a percentage of their salary or sales. A good percentage cap for bonuses is 25%-50% of salary and commissions between 1%-5% of sales.
Whether it’s finance, sales, marketing, or software engineering, each role could be its department with its annual budget for special projects, travel, reimbursements, office supplies, subscriptions, conferences, sponsorships, etc.
These budgets will ultimately become part of the operating expenses.
A hiring plan demystifies the process of who and when to hire over a 2-3 year period. Payroll will likely be one of your most significant expenses. Hence, a hiring plan helps you gauge where it makes sense to outsource and make a key hire in the growth cycle so it doesn’t hurt your company’s financial future.
Daniel Evans is the Founder & CEO of Evans & Company, a financial wellness firm that helps entrepreneurs and high-performing executives confidently make big financial decisions.
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