As I work with ecommerce sellers, a common question is “Can I afford to hire someone to help me?” It’s never an easy answer.
As a business owner, we wear many hats and there are never enough hours in the day. We are taught that we should work on the business not in the business. We need a framework to help us navigate that balance of working on vs. in and to help us understand what we can afford.
The Profit First methodology gives us that framework to answer the question with confidence.
Profit First was created by Mike Michalowicz, author of the best-selling book, Profit First. Mike also has a podcast that addresses all types of entrepreneurial issues. Last December he tackled being intentional with your time.
If you are at that point in your business where you think you need to hire so that you can spend more time working on your business, then let’s dive in and let me give you the basics of Profit First. Then we’ll delve into the strategy for answering the hiring question.
The traditional business equation, Sales – Expenses = Profit, often leaves you with little more than loose change, proving Parkinson’s Law time and time again.
Profit First creates a new equation: Sales – Profit = Expenses.
From a behavioral perspective, your expenses will rise to meet your income, so therefore you will have little left after paying your expenses. By taking your profit first, the funds left over for operating expenses will be less, causing you to operate more efficiently and be more innovative in your business planning. It will also require that you carefully consider and plan for new hires.
Implementing the Profit First system is a 4-step process. Abbreviated below, it consists of:
Creating multiple bank accounts to separate your cash for specific purposes.
You would have one checking account for inventory and one for operating expenses. You would also have individual savings accounts for profit, owner pay and taxes.
Following a prescribed sequence of activities to create a new paradigm of behavior around the new bank accounts.
Your income is deposited in your operating expense account, and then a designated portion of the funds is moved into each of the other accounts based on a specific sequence. Using this well-calculated method, it will allow you to better manage your inventory and expenses and become profitable with your very next payout.
Removing temptation, based on the realization that new behaviors are sometimes hard to maintain.
If the temptation of a growing balance in your profit account is too much for you, then make that money less accessible by moving it to a savings account; preferably at another back.
Implementing a rhythm to optimize the time you will spend managing your funds.
Most ecommerce sellers receive payouts biweekly, so this rhythm already exists. Fund your accounts every two weeks following the sequence outlined here, and then pay any bills due before the next payouts. If you’re using credit cards and auto withdrawals, look at the upcoming payments and ensure that you will have the funds needed.
This abbreviated description of the Profit First process gives you an idea of the paradigm shift that takes place when you implement Profit First in your business.
Can I afford to hire?
To address this question, we take the general Profit First approach and expand on it.
If you plan to hire consistently, I suggest that you add a bank account for payroll. As you allocate your income, designate a percentage for your payroll. In this way, you can ensure that those funds are segregated and used only for that purpose. If you consistently cover your current payroll with your allocations, you know you are operating on solid ground.
Now, how about that new hire?
When you begin to think about the new hire, determine their monthly cost to your business. With your next Profit First income allocation, increase the amount you allocate to your payroll account by the monthly cost for that upcoming new hire. If you can maintain that allocation for the next three months, you are ready to hire.
There are several purposes behind this approach.
- It gives you time to answer a few more important questions. Such as, is there really a need for a new hire; and what will their new role be? While you are in this three-month period, get the role description in order and make sure you are hiring for the right role.
- You will be building up a bank account that will help you cover the new hire. Any time you hire, onboarding is a cost to your business. Typically, there is the cost of the new hire that is not up to speed and other people who may lose productivity as they help with the catch-up. The funding you have set aside for these three months helps minimize the impact of training on cash flow.
- If this new hire is going to help generate revenue, it will not happen immediately. The funds set aside for the three-month period will help mitigate those additional costs that you incur before the impact on the income side is in place.
Once you have successfully set aside your three months of pay and you bring a new hire on, your cushion in the bank account will help you operate with positive cash while the new hire begins to contribute. This is the way to grow organically.
As with all of the Profit First strategies, growing in a sustainable way for the long term is preferred to quick changes that require debt to fund. You go from taking profit last to taking Profit First! And once you begin to pay yourself on a regular basis, you’ll never go back!
As an entrepreneur myself, I understand the challenges of hiring and building a team. It was my desire to build a business that would run itself. A business where I primarily work on the business and not in the business.
Over time I have hired a team that operates my business and allows me to step back. Last July, I was able to step away completely and take a 4-week vacation. It was an experiment that resulted in growth for me and my team. It was all made possible because I grew my team using the Profit First framework. I know you can do that too.
Check out my new book, Profit First for Ecommerce Sellers for a more in-depth look at the Profit First method, customized specifically for eCommerce sellers. It’s available on Amazon.com and where ever books are sold.
This post was contributed by Cyndi Thomason, President of bookskeep.