Entrepreneurs riding out the economic ups and downs may not have spent much time wondering whether to add new employees. As the economic recovery begins to take shape, however, they may want to start thinking about it.
But it raises a question: How can a small-business owner know when it’s time to add staff?
You need to add workers if . . .
Ultimately, of course, spending your hard-won capital on a new hire requires a leap of faith. Still, you can improve the odds that leap will end in a happy landing by following a few rules. Some are quantitative; others involve less exact methods of forecasting.
Here are four signs that it’s time to increase payroll:
1. The amount of overtime you pay is increasing. Periodic spikes in this expense item may be nothing to worry about. But Charlotte Taylor, founder of Venture Concepts, a Washington, D.C.-based small-business consulting company, says that if a clear trend emerges, you should consider hiring a new employee. As Taylor points out, inefficient spending isn’t the only reason to be concerned about excess overtime; it may also indicate the existing workforce is nearing burnout.
2. Your backlog of sales is (or may soon be) growing. Sufficient orders in hand mean you’ll have the wherewithal to pay a new worker while also indicating a surge in demand for your goods or services. That in turn will require extra help. And even if the backlog isn’t quite where you’d like it to be, Taylor says, it may be worth making a hire to take quicker advantage of increasing demand. You can reduce the risks of such a gamble by polling your customers to see how they’re faring in developing their own order backlogs.
3. Your business’s billing multiplier has risen above the norm. The billing multiplier is computed by dividing net revenue by direct labor costs. The higher it goes, the more money you’re making per unit of labor. If you don’t know what’s normal for your industry, your accountant probably can tell you or help you find out. Aldonna Ambler, a consultant in Hammonton, N.J., says the multiplier tends to get out of whack among business owners “who don’t keep track of their capacity utilization and productivity, and so are hiring at all times by the seat of their pants.” A too-high multiplier, she adds, is a sign that the work force may be overloaded.
4. Your debt is at a level that allows you to assume additional risk. “It’s a matter of leverage and credit and risk,” Ambler says. “You make a decision that you can pull out of the recession quicker by investing in an additional person. You look at your debt service and see how much of a risk you can afford.” Ambler adds that it’s crucial for an entrepreneur to know when the gamble has not paid off and a new hire needs to go. Too many small-business owners are reluctant to make that kind of tough decision, she says.
Full time versus temporary
Once the decision to hire is made, the question is whether to hire a full-time employee, a temporary worker or a subcontractor.
“If the work is part of the core service of the company, it makes sense to hire [a full timer],” Ambler says. “But if it’s more of a secondary thing, or not as important to the customer, it’s better to subcontract because you reduce expenses.”
Taylor also recommends subcontracting as a way to obtain professional help with a minimum of hassle. Many outsourcing companies, she notes, provide a worker with health insurance and will withhold taxes.
In the case of lower-level support staff, Taylor says several of her consulting clients have used temps to cover short-term needs and then ended up hiring them for full-time positions. “It’s an excellent way to try people out,” she says.
Competition with big businesses
But small-business owners needn’t be in too much of a hurry to add staff, thinking the labor market will slam shut or the competition for skilled workers will be too daunting as the recovery gathers steam.
While it is true that small companies have difficulty competing against major corporations in the area of benefits, Taylor says, “Most people who go with a small business have concerns other than money. The person who has gotten an MBA and wants to go with a big corporation is going to go with a big corporation.”
And, she adds, there’s always the growing pool of skilled older workers who have taken early retirement. They constitute a hiring ace-in-the-hole that small businesses will play with increasing frequency.