Hire Your First Employee. Rhonda Abrams

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      Hiring an employee helps you grow your business, especially if you’ve carefully considered what type of employee you need and how much you can afford. Having another person onboard gives you more time to focus on growth—to develop innovative new products, reach out to your customers, spend less time on administrative tasks, or simply focus more energy on your work.

How Much Can You Afford?

      One of the biggest hurdles to overcome when deciding to hire is figuring out how much you can afford. You’re probably, naturally, worried about how you’ll afford to pay an employee and still have enough income for yourself. After all, if you don’t make enough money in a month, you still have to pay your employees—it’s the law. That means you might not have enough money to pay for other things—your rent, your suppliers, yourself.

      Fear over making enough money is probably the biggest obstacle to becoming an employer. But employees are an investment in your business—not just a cost—and the goal is greater growth. As with every investment, you can address your concerns with some careful planning.

      When figuring out how much you can pay an employee, take the following steps:

      1. Review your current monthly cash flow. How much money goes through your business each month? Remember, even if your business is profitable at the end of the year, you have to make payroll every two weeks or so. That means you need cash in the bank. So be sure to first take a realistic look at your monthly dollars in and dollars out.

      2. Estimate your current monthly profit. Have you consistently been generating enough income to support the type of employee you need, as well as yourself?

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       Figuring Taxes and Benefits

       While you’re considering how much you can afford for a new employee, remember to also budget for payroll taxes and benefits. As a rule of thumb, budget 15-30% of their salary for additional expenses.

      3. Estimate expected additional income. The goal of hiring employees is to enable you to make more money. How much will your new employee realistically help you generate? In what time frame? Be conservative in these projections, especially at first.

      4. Estimate how much you’ll have to pay an employee. You need to know how much you’ll have to budget for your employee(s). Once you decide what role and tasks you want your new employee to assume, determine comparable pay rates (see Chapter 6).

      5. Estimate monthly taxes and benefits. Don’t forget that you also have to pay taxes and benefits. The total amount will depend on which benefits you decide to offer.

      6. Estimate additional costs. Having employees means you typically have other additional costs. Will you pay higher rent for more space? Have increased telecom, travel, or energy expenses? Even greater use of office equipment? Make a guesstimate of some of these costs as well.

      A good plan is to save up for payroll, just as you save for other investments. Set up a separate payroll account with enough money to cover at least three months worth of payroll and taxes. Expect to make payroll from monthly cash flow rather than this separate account, which acts as an emergency backup in case you have a bad month. This financial cushion allows you to hire with more confidence.

worksheet: How Much Can I Afford?

      Use this worksheet to estimate how much money you’ll have available each month to go towards wages/salaries.