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Starting a small business Part 4

November 25, 2012

Should I hire employees?

NO!  NEVER!  People suck.  Quote me on this.  The majority are fat, stupid and lazy.  Don’t believe me.  Check out the Black Friday videos on the web of people brutalizing each other to save $20 on a flat screen TV that they don’t really need.  This is probably your pool of potential employees for most service businesses (restaurants, spas, daycare, etc.)

The hiring of employees requires more math just like the math in Part 3.  A full time minimum wage employee in Connecticut will cost you a minimum of about $20,000 each year.  There are roughly 2000 business hour in a year and the total includes minimum wages, employment taxes, and workers compensation insurance.  It doesn’t include the expense of training, oversight, compliance, occupancy or capital needed to hire and maintain employees.  At a minimum, will your employee generate Gross Profit of at least $20,000 each year?  If not, DON’T HIRE THE EMPLOYEE!  Use the calculation of annual earnings multiplied by 1.2 to determine the real employment cost of each employee.  If they can’t provide at least that much in Gross Profit each year, you CAN NOT hire them.  They will lead you to bankruptcy if you don’t perform this simple calculation.

Let’s extend my example from Part 3.  If the owner wanted to hire a full time, minimum wage employee, she would have to sell about 5 snow globes each and every hour to be able to pay rent, pay the employee and buy more inventory.

There are more problems with employees than just paying them:

My town has an unemployment rate over 15%.  There are plenty of low skill jobs available in light manufacturing and service businesses like restaurants and retail.  There are also plenty of local manufacturers who can’t find skilled labor at much better pay.  Some of these businesses have to import workers from 20 or more miles away to fill open positions.  Why?  Because almost all people have a sense of entitlement.  Why should they have to be productive and responsible for 8 hours each day when the government will give them food stamps, healthcare, housing, phones and disability pay to do nothing?  Our minimum wage is $8.25 per hour.  These benefits, if eligible  will definitely exceed that per hour for doing nothing.  Slightly more industrious people will work just enough to make some extra cash and qualify for the Earned Income Tax Credit.  Do you honestly think these people will work hard enough for you to be profitable?

If you hire employees, you need to be the asshole!  Nice bosses will be bankrupt employees.  Seriously, watch those Black Friday videos again.  Do you think Steve Jobs, Bill Gates or Gordon Ramsay were nice bosses?  Don’t be an idiot.  They were/are assholes.  They had enough experience to know that people will take advantage of you whenever they can.  They knew that in order to be successful, they had to be assholes.  Good employees will recognize the necessity of this, work hard, and rarely need to see the asshole come out.  These people are few and far between.  Most people will hate you but just fear you enough to be productive.  BE THE ASSHOLE.  You’ll be much happier and successful over the long run.

I’ve hired people but fired many more.  I enjoy the firing, except when regretting the hiring.  Fire quickly and hire very, very slowly.  Do the math.  If the potential employee will not produce enough Gross Profit, don’t hire them.  If the employee stops producing the required Gross Profit, fire them.  All of the restructurings that I’ve been responsible for were undertaken to save the company.  I’ve never laid off a person and then missed them later.  It is NOT PERSONAL, just business.  Businesses can’t stay in business if its employees are not productive.

NEVER HIRE FAMILY!  I used to go to a family owned diner where 3 generations owned and operated it.  It seemed to work for them.  It might be because each generation grew up in the business and understood the need to work hard and collaborate.   Odds are that family employees will be your worst employees.  Family members may have a deeper sense of entitlement than strangers.  They may feel that you owe them because they’re family   How would you feel about firing your brother, mother or father-in-law.  The hassle probably isn’t worth the money.  Avoid hiring family members.

Consider outsourcing.  Rarely will you find a business that needs an employee for exactly 40 hours each week,  Only non-experienced government technocrats believe in the 40 hour work week,  If you have more business than you can handle (bully for you), or need specialties and services that you can’t provide, consider outsourcing.  You should end up only paying for what you need without the burden of employees.  Maybe restaurants can’t outsource french fry flippers but there’s no reason why I can’t outsource bookkeeping or simple tax return preparation.  I always recommend outsourcing before hiring employees.  You will still have to manage outsourced activities but you’ll have more flexibility and end up spending less money than having employees.  My biggest regret in business is not following my own advice on this.  I never should have hired employees.

If I sound sarcastic, I’m not.  My advice is based on more than 20 years of experience with over 100 business including my own.  If I sound angry, I’m not.  I’ve learned to separate emotion from business decisions – you should too.  If I sound cynical, good.  Healthy doses of cynicism and skepticism will save you money and sanity.

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