Monday, December 19, 2011

The Cost of an Employee

File this under "Massive slap in the face after being splashed with cold water."

In my SOP Friday series I have discussed The Hiring Process for I.T.. Next Friday I'm going to talk about Hiring Your First Employee.

But there's a bit of business to take care of before that: Do you have the money to hire your first employee?

This topic is important because it has a huge impact on your ability to grow and be profitable. Once you have a few employees, you will realize that labor is the most expensive thing in your company. It's hard to see when you're a sole proprietor because you don't pay yourself more or less based on the number of hours you put in.

(Note: Adjust figures as needed. Percentages are probably about right, but you might pay more or less, and make different assumptions regarding all numbers. It will be a good exercise to run the numbers for yourself, in your business, in your state/city/country.)

The Real Expense of An Employee

It's important to make a very rational decision when it comes to hiring. Yes, you're super busy and maybe even overwhelmed. But that doesn't necessarily mean that hiring someone is the answer. With employees come liabilities.

First, the employee will cost money. Let's say you pay $20/hr. At half-time, that's $400/week. At full-time it's $800/week. Then add Social Security, state unemployment, federal unemployment, and all the miscellaneous taxes. Depending on your state, this could easily be in the range of 10-15% extra.

Second, there's insurance. At a minimum, you have to have worker's compensation insurance. That's required by law. You have to decide where to get it. Absolutely shop around. You will pay way too much the first year, and less the next year. You'll need to shop this every 2-3 years for the rest of your life. Figure another 5-10% of gross wages.

You might also decide that this is the time to tune up your business errors and omissions insurance. If you don't have it, now's the time to get it. Then there's general liability. You have to be covered in case your employee backs his car into a client building, or blows up a $5,000 server. Depending on coverage and insurance company, figure $1,000-$1,500 a year for both.

Then you'll have to pay the employee for gas/mileage. Starting January 1, 2012, the federal rate is 55.5 cents per mile. If an employee makes ten client visits a week, at 20 miles each way, that's 400 miles or $222/week. Just over $11,000 for the year!!!

You'll end up paying for some meals for your employee. It might be McDonald's, but it's still $5 here and $10 there.

Your employee will need a desk and a chair. You might provide a computer, a waste basket, and some other niceties. Most of these are one-time costs.

You should have a PSA system (Autotask, ConnectWise, Tiger paw, etc.). So there's another license expense there.

Will you pay health benefits? Depending on the plan and the employee's age, this could be anywhere from $150/month to $1,000/month. It is best to wait on this if you can. Remember, this is a highly regulated element of employment, so you have to offer the same thing to everyone.

Again, what about 401K or some other defined benefit program? X% off the top. And you have to offer the same thing to everyone. And again, you will probably want to wait on this.

In all, expect to spend about 40-50% extra in additional costs for every hour of labor paid. You can only cut so many corners here. Let's figure low and add 40%. So your $400/week employee really costs you $560/week and your $800/week employee costs you $1,120/week.

Assuming there are unpaid days off somewhere, multiply those numbers times 50 weeks to get the real cost.

Let's do some rounding down. So without any benefits or health insurance, your $20/hr employee will cost you about $50,000 a year.

It is critically important that you get this straight in your head: That employee does NOT have to earn you $50,000 to pay for himself. You will have to train him, monitor him, work with him, and take YOUR time away from other things in order to make him productive and profitable.

Breaking Even is Not Profit

You've got an employee that costs you $50,000 plus a bunch of your time. Now consider how much money you need to bring in to make that worthwhile.

It's not $50,000. That's really not even breaking even. Give your extra time, hassles, and all the government forms, let's call the cost $60,000.

With all the money and all the hassles, how much does this employee have to bring in to make his presence worthwhile? An extra $10,000? An extra $20,000?

DO NOT fall into the trap of hiring someone just because you're overwhelmed. It might be easier to DROP a handful of really small clients rather than climb the mountain that leads to being an "employer." It might be more profitable to fire a couple of clients!

There are many paths to get away from being overwhelmed. Don't assume you have to have employees.

Let's assume you want this new employee to net you a modest $10,000 in extra profit.

That means you have to be able to BILL (and collect) an additional $70,000 the first year.

That seems like a big number, but it's very manageable. Remember that no one is 100% billable. You should be able to make your new employee about 50% billable the first year and 60-65% billable the second year. 50% means that you will pay him two hours labor for every hour you are able to actually bill a client.

That means you'll max out at about 20 billable hours per week. Multiply that by 50 weeks and you have 1,000 billable hours. If you charge $100/hour, that's $100,000. Looks easy!

That always looks so good on paper.

But it never works out that way in the real world.

You will work your ass off to reach these numbers. It is possible. But YOU and your employee need to be focused like laser beams on making billable hours the highest priority.

You can do it.

But it's much harder than it looks.

Where Do You Get $70,000?

Let's stop staring at that $100,000 number. Maybe next year. For now, let's focus on the more realistic $70,000 figure.

If you're a sole proprietor, that still looks like a huge number. You might have ten clients paying $1,000/month for a total of $120,000. So an extra $70K is a huge increase. How is it even possible?

Well, here's where you have to have a strategic plan. Do not fall in love with the idea of hiring employees until you have a plan.

It starts by dividing the problem into manageable chunks. Start by putting your new employee on standardized monthly and weekly procedures. For example, if he can knock out all of the client monthly maintenance checklists, he will touch every client machine AND learn your processes more quickly.

Next, divide up that $70K into weekly goals. You need to bill about 14 hours a week to reach that goal. So maybe give the tech a personal goal of three billable hours per day. And schedule the work in your PSA system so that the first three hours of each day are billable. If you can do that regularly, you'll have 15 hours/week!

Scheduling the truly billable work first thing each day will ALSO show you that it's not as easy as it looks. ;-)

The good news is: You went down this path because you're overwhelmed and need someone to help with the work. Just make sure it's billable work. So you've got a backlog. Put the new tech on the billable stuff.

The bad news is: If your tech is any good, he'll knock down your backlog in short order. This is actually a good argument for hiring someone half-time if you can. That way you have a longer lead time to generate additional labor and clients.

Another way to divide up the $70K goal is to figure out how many new clients you need to add. What's the size of your average client? How many servers? How many workstations? How many hours does it take to support them? How much money do they bring in?

Define an idea client. Then go out and start selling.

Work will not magically appear! I know you know that. But many people just don't accept the fact that they need to sell themselves in order to get new work. If your target client has 20 desktops, one server, and brings in about $1,700/month, that's $20,000 a year. Great. You need three of those. That's $60,000 plus project labor. That should get you to $70,000.

. . . Ugh . . .

Did you see what just happened? You became the sales guy. At least you became the person who needs to sell three ideal clients this year. In addition to all your other work. And you've lost a certain amount of your time managing an employee and dealing with all the paperwork, taxes, forms, insurance, and personnel issues.

It's hard . . . it's really, really, hard to hire that first employee. And it's a hard year ahead to make it work. As I've mentioned before, it took me several attempts to build a business that could support additional techs.

Now it's easy. But of course we have lots of clients, and we have processes in place. Building that from the ground up is hard work!

If you haven't already read it, PLEASE do yourself a favor and read The E-Myth Revisited by Michael Gerber. He tells the story of someone who started to grow, hired an employee, dealt with the "stuff" around that, lost the employee, and developed a successful process for moving forward.

This is hard.

But it's very possible! Millions of businesses have figured out how to do this! You can do it, too!

I didn't write this to discourage you. I wrote it to make sure you proceed with your eyes open. It's hard, but it's possible. And when you come out the other side as an employer that knows how to manage employees for maximum effectiveness, then you're on your way to a whole new world of entrepreneurship.

Stay tuned on Friday for my SOP installment on Hiring Your First Employee. December 23rd at


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