11th February 2014
So you’ve got your business up and running, it’s making money but you are running yourself ragged and it’s starting to feel like there’s enough of a workload to share with another person – aka, an employee!
You’re terrified and overflowing with questions:
- How much money do I need to hire my first employee?
- Should I save up a year’s worth of their salary before hiring them?
- Are there going to be expenses beyond their salary I need to consider?
- What are the legalities of hiring somebody, do I need to worry about contracts, heath and safety
So, one of the best pieces of advice I ever received was that the more emotional the question, the more you should try to ground the answer in fact. Hiring your first employee is a question of cash flow and comfort level. When you’re a one man band waiting a few days extra for cash to move from the customer, in to your business account and then in to your wallet isn’t a big deal. On the other hand, ask your employee(s) to wait a few days before getting paid and you’re likely to start something resembling a riot.
Having a year’s salary in the bank is a great place to be, but not necessary and potentially wasteful. The capital should instead be spent growing the business as opposed to sitting in your account as a stop gap against regular cash flow. That said, you also don’t want to end up in debt as a result of payroll. So you need to crack open your cashflow forecast spreadsheet…you do have one right?
If not email us on firstname.lastname@example.org and we’ll send you our template. Anyway, fire up your forecast and put the money that you expect to generate in your income. It’s guess work so it doesn’t have to be 100% accurate. Then, on your expenses add the new hire and see what that looks like over the coming six months. Don’t forget to input any potential additional revenue the employee could generate for you.
There are of course additional expenses on top of your new employee’s salary. It varies from country to country, but typically the business is responsible for additional contributions beyond an employee’s tax deductions. In the UK, the company pays National Insurance contributions in addition to the contributions the employee makes. There’s also equipment, office space (if they’re not remote working), software licenses, stationery, etc. These additional costs should also be factored in.
If your cash flow suggests you have the money to afford bringing on the employee, with cash on hand to afford the incidental expenses necessary for him or her to do their job, and you have access to credit to cover any shortfalls in cash flow you’re good to go.
Congratulations on reaching this point in your business, it’s exciting to create jobs for people. Sending the employee their first payment after they deliver quality work for you is incredibly satisfying.