The Side Hustle 05: How much should I be spending on staff?

Reading time: 3 mins.

Welcome to edition 5 of The Side Hustle, your weekend ecommerce tip, tale or yarn.

I'm revisiting a lot of the questions I get from clients, particularly as I build my new course, Ecommerce Start - How to build a profitable online business in under 90 days. By the way, that course launches on September 1, and has 25% off early enrolments until then. 

Today, I want to talk about hiring and wages, and tackle a couple of questions I often get.

1. How much should I spend on wages?

Over the years, I've broken down a model that I think delivers a profitable framework to online retailers, and it consists of staying within certain ratios. One of those ratios involves wages.

Before I dive into numbers, I want to preface the framework by saying, ultimately how much you can spend on anything depends on your desired outcome. So I'm going to assume that we're thinking alike, and going back to my 50/30/20 rule which dictates that you would to hit at least a 20% net profit. 

Within the medium to large businesses that I work with, of say $500k per month and above, wages vary from 7% of net monthly revenue, to 22%. Just to explain that ratio, if you're making $100k a month, and you want to achieve a 15% wage budget, you need to be spending $15,000 per month on wages. 

The sweet spot is about 11% of your monthly revenue (ex tax) being spent on wages. A couple of per cent either way shouldn't be a problem. If you're below 10%, you're running nice and lean, and it either means you're running with extremely efficient processes removing the need for people, or your sales are booming and you're keeping things simple. If you're at 20% of your monthly net sales being spent on wages, then you're running a bit high - you would want to have a financial model that shows that coming down to 15% and below over the next 6-12 months.

And yes, I include contractors in that number.

2. When should I hire?

I'm going to split by answer here into two groups; 1) start ups, and 2) established online businesses. 

Start ups:

A start up should be able to get to $100k a month in sales with no FTEs (full time employees), aside from the founder. Sure, you might need some casual help to pick and pack orders, but that's about it. 

Recently, I posted on LinkedIn about one of the business owners I coach proving this model. 

As a start up, you're likely also faced with that difficult decision, about when you or your partner should quit their job, and go full time in your side hustle. I see too many people go early - If your full time job is paying you a wage, and you can build your side hustle after hours, I absolutely recommend that. Your full time or part time job is giving you the salary you need to focus on your side hustle, and allows you to reinvest in your growing online business - something you'll almost definitely have to do. 

I'd suggest building yourself a wage budget of around 15% of your monthly revenue, and paying yourself that. When that number is enough for you to quit your day job - go for it. Although, if your day job isn't too stressful, and you're managing your side hustle ok, you may elect to spend that wage budget on another hire, like a picker and packer or customer service person, and keep to your day job for a little longer. 

After all, why would you quit a good paying job if you don't need to?

3. Contractor or Permanent staff?

Along the same lines as question 2, I'm always thinking about two things in business; 1) Growing sales as quickly as possible, and 2) Spending as little as I can to do it. With that in mind, I almost always go for contractors before permanent staff.

As a rule, if I'm not great at something, I contract it out. For example, it's important for a new business to have a strong brand identity (something I talk about in my course). By this I mean a good logo, brand colours, fonts, mailing bags, packaging - and all of the things that customers and potential customers will see when they look at your brand. 

If you're reasonably savvy, Canva can be great, however I would typically contract this out via Upwork (you're looking for someone to crate a brand identity for you). 

The next contractors you're likely to look at are marketing contractors. Now I'm going to wear two hats here, one as a marketing agency co-owner at Ecom Nation, and the other as a coach to online retailers. Really, I think that an online business owner should be able to get close to $100k a month in sales before needing to outsource marketing. 

If you're outsourcing before that point, there's a fair chance you're being lazy, and not taking the time to learn the tools, and learning the tools is going to help give you that foundational knowledge and experience you need to be able to manage big marketing budgets and strategies down the track, and it will also enable you to be able to have strategic discussions with the marketing agency that you eventually appoint.

Essentially, when you've had a couple of months in a row where you can't seem to break through a certain revenue figure, and when you're increasing your paid media (advertising) spend, but the revenue isn't growing, it's time to look at an agency, or a hire (again, I would go a contractor first, for the cost and the flexibility to scale up and down). You should appoint an agency to manage your paid media spend when you're sure that they can deliver a better return than you can. You shouldn't be appointing an agency to take over the work, you should be appointing an agency to improve the work.

To summarise, you should be able to make $100k a month, or close enough, in monthly sales before hiring a permanent team member, and when you're looking at adding to your team, consider contractors initially. 

Remember, wages should sit below 15% of monthly revenue, for maximise profitability, if you're over 20%, you're on the high side, and should think about investing more in process over people.

When thinking about hiring someone, create a seven point job description. If you can easily identify seven important things this new hire would do, then go for it. If you're stuck on four or five, it probably means that the role isn't really needed.

Remember, there is more than one way to increase your profit. Expenses should be carefully managed within a framework, and wages is a key part of that framework.

Paul

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