A big company bench can allow you to scale rapidly, but excess payroll costs can also drag you down…fast. On the other hand, you can’t be too timid or slow, the market waits for no person. So how do you handle this dilemma?
At some point your startup company will begin moving from the bootstrap phase to launch. This comes when your product or service starts to gain traction. At this point, your resources become stretched and your internal capacity starts to become the constraint to growth. Often, this is the point where founders begin to think about outside financing. However, money is only one part of the equation. Investors want to know what you are going to do with “their” money and to be convinced your plan will deliver the desired results: scale and increased profit.
Even when you have sufficient funds, the issue is what level of capacity (or more important, excess capacity) do you want to carry forward? In other words, how deep should your bench be in order to handle growth? If your people are maxed out, it’s easy to think that simply adding more people will de facto increase production, revenue and profit.
It’s not that simple.
First, there is often a delicate balance between labor and material inputs when it comes to creating additional output. Particularly, if you are a manufacturing operation, you will also need additional components in conjunction with employees to increase production. Therefore, expansion entails not just the cost of payroll but the initial and carrying cost to acquire and maintain inventory.
One further consideration, is the issue of capacity that an individual creates. In my construction operations, the decision to add a Project Manager was difficult. Such a person was fairly expensive and had the capability to manage a number of activities. Simply adding one additional project was not a sufficient reason to hire. The margins initially plummet.
The decision to add a Project Manager is, in fact, a decision to significantly expand production.
This entails the requirement for significant other costs in labor and materials and the access to capital to support that expansion. I didn’t always get that right.
In addition, you must consider “time.”
- There is a lag between when you begin your search for a qualified employee and when you find the right fit.
There is also training time to teach them your system and verify their ability to actually perform in your operational environment.
- You will have a period of under-utilization when you first bring on new employees.
This will increase your marginal costs to produce goods or services putting another potential strain on your cash flow.
- There will be some time before you can actually increase your inventory.
Order, fabrication and shipping times must be taken into account. Not to mention any necessary storage capacity you may need which might entail further real estate costs.
The real question is, when do you increase the depth of your bench and add employees?
This answer will vary from startup to startup. Anticipating needs is important, but projecting growth can be a notoriously difficult task to get right. It warrants careful planning and evaluation. This is one of the real dilemmas of entrepreneurship. A big bench can allow you to scale rapidly, but excess payroll costs can also drag you down…fast. On the other hand, you can’t be too timid or slow, the market waits for no person. So here’s some advice to help with your decision:
Consider Adding Employees If:
- Your business has plateaued, but has a stable revenue that can take a loss if necessary.
- Demand is surpassing supply. This seems like a no-brainer, but many entrepreneurs would rather save every penny than invest in another employee who may or may not work out. You have to spend money to earn money.
- You need key personnel with experience outside your realm of expertise. For instance, you may be a fantastic business-savvy entrepreneur, but that does not mean you will be a fantastic programmer, or HR rep., or marketer. If your business is hurting because you insist on being a jack of all trades, you have a hard time becoming a scalable business.
Consider Waiting to Expand If:
- You’re paying employees on borrowed money. Investments and funding should go to the business, but a payroll will not survive without consistent incoming revenue.
- The team dynamic / culture is unstable. If there is a high turnover, volatile work environment, and an un-coachable team, then adding a new member will only make matters worse. Regain structure and order within the company first or you will inevitably create a downward spiral.
- The business is on a rollercoaster. If you’re operating month to month on spectacular highs and nearly devastating lows, then it’s not a good idea to hire new personnel. Create a consistent even or upward trend before risking losing money for the business.