In Simple Numbers, Straight Talk, Big Profits, accountant and EO Accelerator lecturer Greg Crabtree offers answers to the most common financial questions he hears from startups trying to reach $5 million in revenue. And when it comes to the biggest question of all—profitability—Crabtree says the most influential factor “is how much productivity you get out of each dollar your spend on labour.” (Including your own.)
Follow these suggestions from Crabtree to get the most out of every dollar you invest in your employees:
Set a salary cap: Know how much you can spend on employee compensation before deciding how many people to hire. Find the magic number by subtracting your desired pre-tax profits (Crabtree suggests 10-15% of revenue), and non-compensation expenses from your projected revenue. Use this amount to decide which key roles to fill now and which can wait.
Hire smart to increase growth: Avoid hiring employees to take on tasks you can do yourself early on. When it’s time to hire, look for positions you can outsource, such as accounting, IT and marketing, to find the skills you need at a lower price, and concentrate your in-house employee spending on income-generating positions like sales and operations.
Think like an NFL coach: Hiring a star quarterback costs far more than taking on a rookie player, so evaluate your business goals and employee options before hiring high-priced talent. An experienced employee can have 15 years of solid experience, or one year of experience 15 times over—and the bad habits to show for it. A green employee with the right skills can be trained to maximize his value to your company, at a lower initial salary.
Evaluate employees’ performance and goals regularly: High employee turnover drains profitability and leaves you in a constant cycle of hiring and training. Meet with each employee at least twice a year to evaluate his performance, and to discuss his goals and career path. If an employee wants more money, offer specific advice on improving their productivity to attain a more senior role or a raise.
Keep evaluations simple: You can probably list 30 skill sets you want an employee to have, but realistically you only need three to five core competencies to evaluate whether an employee’s productivity is in line with his compensation. Concentrating on the key skills needed for each position will help you help you hire the right candidate the first time and offer better instruction to your existing staff on how to improve performance.