The e hustle 33: Hiring staff rarely results in growth

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Hiring staff rarely leads to growth

Hear me out.

I’m not saying not to hire, I'm just advocating for most brands to slow it down a little.

There’s a few topics that I generally zero in on when looking for quick wins towards marked improvement in profitability, and one of those is wages.

It’s not because I don’t like people - I love people, and I love contributing to the economy by hiring people. But what I like more than contributing to the economy, is contributing to my bank account first.

Hiring mistakes

We generally make hiring mistakes at two critical points.

1. At the start of our business
2. When we see some initial success in our business

At the start of our business

The classic mistake is to quit your day job too soon. Technically hiring ourselves too soon is the mistake we make here. Quitting your day job too soon puts immediate financial pressure on you and your new business, and that isn’t fair. 

A new business is like a pot plant - bloody slow to get going, but eventually if we feed it enough, it grows into something pretty - and that means reinvesting in our new business initially to grow. 

Allow that time and money for it to grow, while you’re getting paid somewhere else.

The other mistake is to hire staff because you ‘have a business now’, and hiring someone will help it grow.

That almost never happens. 

In reality, nobody is going to work as hard as you - and nor should they. If you’re going to pay someone, pay yourself. If you find yourself hiring people before you’re paying yourself - call me, you have a problem in your business.

(Don’t call me but you can email me).

When we see some initial success

We make a few sales, hit $100k a month, $1m a month, $5m a month - it doesn’t really matter what the number is, but at some point a lot of good businesses decide that they need more staff, or better staff in order to go to the next level.

I’m investing for growth. Except that you’re not. 

I’m investing for growth is one of the worst things you can say to me as a business owner. It’s code for “I’m blowing heaps of money.”

Businesses have this temptation to hire people that they think can get them to the next phase of growth. In my experience, that almost never happens. If something is blocking you from getting to the next level, it’s unlikely to be a magic team member or two. 

Here’s my approach to hiring

Set your budget for wages. If you don’t have a budget for what is probably in your top 2 operating expenses, you’re looking for trouble.  If you’re under 11% of monthly sales (less tax), you’re going well. If you’re over 17% you’re very heavily staffed and possibly lacking process, automation and efficiency in your business. 

More on setting budgets for wages here. 

Set your budget and hire when you drop below the budget.

So if your target is 12% of your monthly net sales on wages, you should hire when you’re at 10-11%, in other words you’ve reached your capacity - just. If you do this, you will end the year at your desired budget or even slightly better. 

If you hire when you’re over 12%, say 15% but you tell yourself that you need to in order to get the revenue, which will then bring you down to 12%, well that usually never happens. A little bit of stress on performance is not a bad thing - you don’t need to be breaking at the seams to hire, but you should be feeling a stretch, if you intend to be a lean, mean profit profitable machine.

If you keep allowing yourself to go over your wage target, you will not catch up, the over expenditure compounds, and you will miss your profit targets.

You should be more worried about missing your profit targets than missing your sales targets. 

If you don’t have profit targets, call me (email me).

In summary

Over indexing on wages is a key indicator for me, or a non profitable or low profit business. It’s one of the things that will make a difference to your profit and your cashflow. 

If your business is breaking when you bring wages down to sub 15%, you have a problem with process, efficiency or automation that you need to address.
Remember, process over people.

Until next week,

Paul

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