Friday, December 23, 2011

SOP Friday: Hiring Your First Employee

In November I talked about the Hiring Process for I.T.. Way back in 2008 I discussed Hiring Your First Employee, which covered my personal experiences.

A few days ago I addressed the cost of hiring a new employee. You might want to review that before you read this post.

Today we're going to look at some important things to consider when hiring your first employee. We're not talking about a contract employee or a sub-contractor. I consider these the seven "big picture" policies you should adopt regarding hiring 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.

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Sidebar: The Real Expense of An Employee
First, let's remember a few key points about the real expense of employees.

First, being overwhelmed is a reason to address being overwhelmed. Hiring an employee is not necessarily the path to deal with the fact that you're overwhelmed.

Second, firing a few key clients might be more effective and profitable than hiring an employee.

Third, employees cost lots of money. Lots and lots of money. In ways you can't imagine until you've done it.

Fourth, employees have to bring in a lot more than their salary. You're not here to break even.

Fifth, hiring employees means selling more work!

. . . on the positive side . . .

Having employees allows you to grow your company in ways you can't imagine. You can do more things, serve more clients, make more money, and take a day off!

[end sidebar]

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With that in mind, here are some thoughts about your first hire.

Thing One: Hire an Assistant First

Why are you hiring an employee? Is it because you're lonely? Probably not. Is it because there's too much work, or you see a bunch of work coming down the road? Probably.

Looking back over the last 16 years as a business owner, and having built more than one corporation with employees, I hold very firmly to this belief: Hire an Assistant First. That means a part time office manager, bookkeeper, general help. This will be someone who can pick up your shirts from the cleaner, run to the post office, get out the billing, file the paperwork, clean the office, and maybe generate quotes, fax contracts, and do a million chores you've been doing yourself.

As a technical service business, we automatically think the first hire is someone to provide technical service. But that's usually not the best choice.

The easiest way to increase capacity for technical service is to free up YOUR time. An administrative assistant will get that done.

There are lots of people out there who just want to work 10-20 hours a week. The best administrative assistant I ever hired was Lana. She had a kid (and then another), and she just wanted to work 20 hours a week - max. For years I asked her to work more and she just wanted to work 20 hours.

If you do decide to hire a technician first, just remember that you will have to train that person and do a lot of new paperwork. So you will lose more hours in your week! Many people do it that way, but it really is the tougher road to travel.

Thing Two: Create A Budget

I won't rehash the articles mentioned above. But seriously consider what it will take to hire someone and to make payroll twice a month (or however you do it).

Create a budget and tweak the numbers until they make sense. Cut a little here, add a little additional labor income. But be very realistic. It is a horrible feeling to lay someone off because you didn't plan right. (Ahem. Trust me.)

Be prepared to take a personal pay cut! Labor is your largest expense. That means money for the new hire will come out of your personal pocket at first. If all goes well, this is temporary, but be prepared if it's not.

In other words . . . PLAN the financing so there are no surprises.

Thing Three: Be Prepared to Train

No matter who you hire, you will need to train that person. In the short run, that means more time off task for you. And that's very hard to do when you are already feeling overwhelmed.

Take a deep breath. Spend some time at home every morning thinking about your business. Commit yourself to slowing down just a little so you can get more done.

Time spent training a new employee is "unproductive" in the short-term, but will make you money in the long-term. Ultimately, people will either be trained, or they will train themselves. If you train them, then they'll do things your way. If they train themselves, then whatever they end up doing is what represents your company. It is better for you to train them!

Read the E-Myth Revisited by Michael Gerber. For lots of reasons. In particular, giving up too much to the new employee.

Spend time each day showing the new hire one more piece of the business . . . and then hold her responsible for what she's been assigned.

Thing Four: Use a Payroll Service

Don't THINK about doing payroll yourself unless you are an accountant or bookkeeper.

Payroll is a monster pain in the butt - even with one employee. You have to keep aside money for deductions for Federal taxes, state taxes, social insecurity, Fed unemployment insurance, state unemployment insurance, etc., etc., etc. And then you have to transmit these large sums of money through a Federal Deposit Insurance bank with cover forms and blah, blah, blah.

Pay $50 and have someone else do it. Period. If you pay twice a month, you will end up with 24 extra filings, plus quarterly reports and filings, in addition to end of the year paperwork. So that's 29 government sponsored opportunities to screw up and have them put a lien on your house. Unless you count state and federal separately, in which case it's 58 extra filings a year.

Give up now. Just pay the $50.

. . . And don't think about paying anything if you can't make those tax payments. The state and federal governments DO have the ability to take away your car, your house, and you birthday. So do not ever run payroll if you can't pay the taxes.

With any good payroll service, you just jump online, enter hours per employee, and click submit. They'll give you reports with amounts that will be withdrawn from your checking. One amount will normally be for net pay (the amounts on the checks) and another amount for taxes.

The payroll service will file your state and federal taxes for you. They will handle quarterly reports. They will generate end-of-the-year W2s, etc. All you have to do is make sure you have cash flow to make the engine run. (Weekly cash flow projection is the topic for the next SOP Friday article.)

I recommend you find a payroll service that does NOT charge for direct deposit and does NOT pressure your employees to open accounts with a specific bank. Direct Deposit is extremely handy for everyone and is a service you can offer employees for free. So do it.

Thing Five: Paperwork!

You might as well start developing a process now. Create a hiring checklist. This includes creating a job description that stands out and is way better than what the competition is putting on Craigslist. If you want some tips, search my blog for "Craigslist." You can start here: Hacking Craigslist for Job Postings.

Your checklist should also include all the practical things you need the first day and the first week. Will the employee need keys, alarm codes, mileage reimbursement forms, email, logon credentials, Autotask or ConnectWise license, Zenith logon, Sharepoint instructions, etc.? You'll have to do paperwork for hiring: W2s, I-9s, emergency contact info. Set up payroll.

All employees must sign a non-disclosure agreement that covers both your intellectual property and procedures AND your clients' intellectual property and procedures. This must be binding even when employment has ended.

Does this person need a desk? A computer? An anti-static strap?

Think of everything you can and write it down. You'll forget stuff. When it comes up, be sure to update your checklist. It's going to be mostly the same with the next employee.

You will want to create a file for each employee. It will include all hiring paperwork. It will be a place to put information on certifications, letters of reprimand, and everything else related to that person's employment. This file should be in a secure place, under lock and key. This file will include their social security number and probably the routing information for direct deposit to their bank account. Don't be sloppy with this.

Thing Six: Hire Hourly Not Salary, If You Can

Many people have a vision in their head that they want to hire a salaried employee so they can work the person extra hours and not have to pay extra money. Well, the world just isn't that simple any more. First, many states have laws either limiting this or actually requiring extra pay for more than 40 hours. Second, if you just have a backlog and not a permanent need for an extra 1,000 hours of billable labor per year, then you'll be paying someone to sit around wasting time and money.

Salary is a much larger commitment. Someday you can make that commitment. But with a first employee, you need flexibility. You need to be able to send them home early, add a shift here, take it away there. You need to manage your employee as diligently as you manage money. It is very easy to let 3, 4, 5 hours get added to a paycheck. Well, see the earlier blog posts on The True Cost of An Employee.

Value every hour you let someone work. It will cost you full price.

Employee time is a bit like buying things on Credit Card. You buy more because you don't have to open your wallet right now. But you will have to open it within a couple of weeks . . . plus worker's compensation insurance, taxes, etc.

Be prepared to manage employees' time. Time = money.

Budget each week the number of hours you can afford. Assume that a few extra will show up for unforeseen reasons.

Give appropriate tasks to appropriate employees. That means, have the less expensive employees do as much as possible. Is a task REALLY technical, or can an admin do it? For example, if you need to send some reports to a client, do you need a tech to do that? One of the most profitable rules in our company is: If it can be done by an admin, assign it to an admin.

Thing Seven: Don't Feel Bad About Hiring People Part-Time

There are people who automatically assume that "employers" are big, rich companies with billions of dollars to spare. And they believe that handing out part-time jobs for low wages is a horrible sin and the root of all evil in America - and the world. Let me give you another perspective: That's just plain bullshit.

I can tell you from experience that there are LOTS of people who are happy to work 10-20 hours a week for $10-$15/hour. This was true before the recession and it's more true during the recession.

You are doing good things for the economy and the people you hire. You are trying to grow your business. You are literally the backbone of the international economy. More people are employed by micro businesses than Fortune 1000 companies! Be proud of that!

No, you can't afford health benefits or 401K's or paid vacations. But you can put money in someone's pocket so they can pay rent and put food on the table. You can buy them lunch from time to time. You can give them a place to hang out during "off" hours and continue their job search for full employment. You can let them use your phones and your laser printer.

When you hire someone, even part time, you give them a chance to get out of the house and contribute to our economy. No one wants to be unemployed. No one wants to sit around in their house feeling the months slip away without making progress toward a better life. YOU - the employer - can do something to help them.

No, you probably don't have $70,000 or $80,000 sitting around so you can give someone a "great" job. And you can't guarantee their employment for five years. But you can do something. You can do something that makes your business stronger. You can do something that helps someone get back in the job force. You can help someone pay the rent.

The kindest thing I can say about the Occupy Wall Street people is that they are overwhelmed with an economy they can't control. In the meantime, they are completely ignorant about the realities of running a business and trying to make a living as a self-employed worker. And they're really, really bad at math!

Ignore the bullshit.

This little mini-series on hiring your first employee has laid out some of the hard facts about making the jump from a one person company to a two person company. It is hard. And it is expensive.

You know that you might fail before you start. You take a bunch of your hard-earned money, and you place a bet on a stranger to help your company move to the next level. If you fail, you're back to being a one-person shop and trying to figure out how to re-calculate your future. If you succeed, you are NOT an evil mega-corporation.

Scary Fact: In my own experience, and with many consultants I've talked to, it is very likely that you will make about the same amount of profit with one employee as you did with none. If you don't manage it right, you'll make the same amount with two employees as you did alone. Really.

So you need to create a company that can actually make more money with employees than you did without. You have to be prepared to do things differently. And you have to focus on that bottom line.

I met about 1,000 new friends this year as I traveled around the country. Most of them are sole proprietors. Most of them have all of their wealth tied up in their business. They rely on their own wits and hard work to make enough money to pay the rent, make the car payments, buy food, cloth their children, . . . and maybe have enough money to keep one employee's family housed and fed.

I applaud every one of these hard working people. You deserve to be held up in honor as the backbone of America, not derided as evil because you can't pay an entry level technician $60,000 plus 401k.

Be proud of what you do, and what you contribute to our economy.

And if I can help you figure out how to hire someone and stay profitable, let me know.

Your Comments Welcome.

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About this Series

SOP Friday - or Standard Operating System Friday - is a series dedicated to helping small computer consulting firms develop the right processes and procedures to create a successful and profitable consulting business.

Find out more about the series, and view the complete "table of contents" for SOP Friday at

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Next week's topic: Cash Flow - Weekly Procedure


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Service Agreements for SMB Consultants: A Quick-Start Guide to Managed Services

by Karl W. Palachuk

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  1. Hiring more employees is an indication that your business is growing fast and hiring first an assistant is one of the best ways to do. As soon as your business grows your workload also increase its volume. Conducting an interview is the best way to evaluate applicants. One thing that most employers do when hiring is staying focus on one area or in the wrong places. Just like hiring only on job sites like that could be a mistake for your business. It will miss you a great chance of hiring the right person for the job.

  2. Thanks, Nick. The whole world of "hiring" leads to the whole world of managing people. I totally understand why people decide to continue as a one-person shop. But if you do it right, you can get the right person and your company will thrive!


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