Hiring your first member of staff is a milestone for many small business owners, and one that often causes much deliberation. But there are ways to identify when the time is right, as Peter Crush discovers.
Remarkable as it may sound, the last time the UK’s unemployment rate was this low (4.3 per cent), Charlie Chaplin was receiving a knighthood, and Jonny Nash’s Tears On my Pillow was number one in the charts. It was 1975.
Yet, despite appearances, all is not as it seems. Much recent employment growth is not due to recruitment at all. What’s really been driving it is the recent and very rapid growth in start-ups and the self-employed (which has now reached 4.7 million, according to the Office for National Statistics). These are people that often don’t actually employ anyone at all.
Real employment growth would come if only a fraction of those that run businesses took on their first employee. But herein lies a problem.
According to Government figures, of the 5.5 million small firms in the UK in 2016, the vast majority – 4.2 million (or 76 per cent) – are classified as non-employing businesses, comprising the founding entrepreneur only. So how do firms identify the ‘right’ time to make the leap from being just them to needing, and being prepared, to take on someone else?
You might think the answer is simple: growth – but it’s not always that straightforward. “Lots of SME owners probably make enough money to warrant hiring someone, but for many there is a mental block of actually being an employer, with all the perceived responsibility this entails,” confesses Cheryl Luzet, an FSB member and Managing Director of website development company Wagada.
She made her first hire in 2014, after two and a half years in business, and has nine staff today. But she admits she never planned on employing anyone. “If you start thinking about people’s mortgages you’d be responsible for, the fear of red tape and other costs – like paying for people when their trains are late – it can be easier to want to stay as you are, and make a good living by yourself,” she says. “I know lots of my peers that have fallen into this trap.”
It’s obvious that employing someone costs money – and more than just their salary – a factor which can itself be off-putting. In fact, to pay someone a wage of £25,000, firms actually need to find closer to £33,000 a year, after accounting for National Insurance, software licences, training, IT support, the per-head share of overheads, consumables (including stationery) and admin costs. This doesn’t include the time it takes to get up to maximum productivity, sickness, maternity/paternity pay and ad hoc extras, such as an employee doing jury service or having caring responsibilities.
However, those who have made the leap (and now wouldn’t turn the clock back) argue it’s too easy to let perceived red tape curtail them. Moreover, many of those who have taken the plunge wish they’d done it earlier. “Sometimes you can hide behind red tape,” says Damion Viney, a South London franchisee at Crunchers Accountants. “Sometimes it’s best to depersonalise it, and treat taking a person on purely as an investment cost – like IT would be. This means having a business plan first and simply following this. My first employee was three years ago, and because she was built into my five-year plan, it was simply about meeting my expansion goals.”
The alternative is often to end up working all hours and burning out, or start to turn down work, as Jo Sensini, founder of public relations agency Velvet PR recalls of her fledgling business in 2005. “I remember literally turning work away, thinking something needed to change,” she says of the business that now employs 10 to 12 full-time people today. Her initial solution was to take on the occasional freelancer for a month at a time to flex up as she needed, but she says it soon became clear she needed someone permanent. “It meant they could take on extra work, but I could also be freed up to seek out other opportunities,” she says.
Calculating a first hire on a time-saved basis is a useful tactic. Bob Harper, co-founder of Crunchers Accountants, and also founder of Goal Driver – a coaching business that helps small firms develop – says businesses should really be using time flow as well as cash flow forecasts. “This is when they look at the business more holistically, in terms of how many hours they have in a week, what tasks they have to do, and the number of people they’d need to get them all done,” he says. He argues this accurately informs business owners when a first hire is needed.
However, even Mr Harper admits that what many small business owners find most difficult to overcome is the fear of employing their first member of staff, “dealing with all the hassle this entails,” but ending the year no better off financially. “This is when the effort to employ someone simply doesn’t yield results,” he says.
Ms Sensini admits she already had cash in the business to pay for a second pair of hands, and knew she had clients coming to her, so the ‘risk’ was minimal. What arguably requires a bigger leap of faith is not quite having the money now, but knowing that the second person will help to increase turnover. It sounds risky but many actually believe this is the best time to take a first hire on – because it forces the owner to make it work.
“I’ve just decided to take on my first employee in anticipation of, and to allow for, growth,” says Stephen Horrey, founder of waste disposal solutions provider EcoService Ltd. “I believe in our range of products, and have a new model due to launch this autumn. I’ve decided the potential is so great that if I didn’t have an employee in place, I wouldn’t be able to cope in six months’ time.”
Although it sounds brave, Mr Horrey argues that most SMEs leave hiring their first staffer until it’s too late. “They rush getting someone, anyone, out of sheer urgency,” he says, “and as a result they don’t get the right person.” He says that by pre-empting (he hopes) a busy end of year, he’ll have had time to show his new employee the ropes, and get her up to speed. “We even had time to do a trial run, offering 16 hours a week until the role was made full-time,” he says. “Looking back on it, I already wish I’d done it even earlier.”
David Scott, Independent Financial Advisor, and Chair of the FSB Torridge branch, shares many of these sentiments. “Last year I doubled my turnover, but I knew I wouldn’t be able to grow further without taking a new person on,” he says.
“For me it’s basic maths: I know that the cost of employing my first employee – which I’ve done in the last few months – will be far outweighed by the time it will give me back to grow the business. Until recently, I was burning the candle at both ends. I wouldn’t have been able to do my work as diligently as I needed to, which is essential when you’re regulated by the Financial Conduct Authority.”
Mr Scott also used a trial period – he was fortunate to know someone at his local bank who was being made redundant – and he says this gave him the confidence that his employee could do the tasks he needed from her.
“To me, it’s a no-brainer,” he says. “I would have reached burnout. Also, I’ve identified that my new person wants to do training. This is great, because I want a member of staff who develops, and this means that, over time, I can pass fee-paying work to her rather than have her do basic admin work, which wouldn’t satisfy her over the long term.”
It’s worth remembering that identifying the right time to hire doesn’t just involve looking at financial spreadsheets. Mr Harper argues it requires looking in the mirror too. “You need to know you can be a delegator – and if you can’t do this, it’ll never be the right time,” he says. “Also, founders shouldn’t employ anyone until they’ve thought what their core values are. Having a new person onboard means you have to demonstrate what you’re about more clearly.”
But, perhaps most importantly of all, it’s also worth remembering that however big a step business owners think hiring their first employee is, it’s probably an even bigger one for the person they’re hiring. For job-seekers it’s a risk joining a small firm they know nothing about. Business owners that understand this but can still inspire their new employee could see themselves forge a great new business-booming bond.
1. Don’t delay: If you leave hiring until you actually need someone, you’ve left it too late
2. Consider taking out a business loan: Most people try to finance their first employee from their cash flow, but this can put strain on the business. A business loan used to pay a year’s salary keeps things neater
Source: Crunchers Accountants
Anyone taking on an employee has a number of legal obligations.
The main ones are:
Payment: You must pay the minimum wage – currently £7.50 per hour for workers aged over 25, £7.05 per hour for workers aged 21 to 24 and £5.60 per hour for workers aged 18 to 20 – and have a process for paying people. HMRC has a useful tool to help small firms pay National Insurance contributions and set up basic payroll