In my opinion, hiring your first employee is when a business actually becomes a business. As the owner, you are responsible for the livelihood of someone else, and that person is ultimately responsible for yours.
I have said many times that the scariest decision I ever made was my first hire. Getting engaged? Easier. Getting married? Easier. A million dollar loan for office buildings? Easier! Firing an employee? Incredibly difficult, but easier. If I had children I would liken it to finding out your wife is pregnant with your first child. It is exciting and terrifying at the same time. Employee number two is a cake walk, probably like child number two.
There are so many things to consider with that first employee, and I think it is worth walking through a few ideas.
When to hire:
Having quit my job with FedEx in 1999, I was working as an independent computer consultant. Most of my jobs were along the lines of creating Microsoft Access databases for customers. I also did a lot of training and consulting work, both with Microsoft products as well as Intuit's QuickBooks. A fair amount of work came from clients of my accountant as I helped them migrate from paper bookkeeping methods to electronic. Additionally, I handled some small network setups. Essentially, I worked as the IT department for small companies with five to twenty employees. Finally, in 2001, I added traveling to provide training and consulting for Symantec Ghost through Binary Research International.
The rates I charged my clients varied greatly, from as low as $60/hr to as high at $125/hr. For my traveling work, I generally charged $500/day plus travel expenses. And of course, like all independent consultants, if I wasn't working I wasn't making money. When you sell, you don't work, and when you work, you don't sell! Consequently, while $125/hr seems like great money, and it is, it does not translate to a $250,000.00 salary like it would if it were a job. So, my income varied dramatically from week-to-week and month-to-month.
I count myself incredibly fortunate to have had all that going on, and with gross sales of about $100,000.00 annually, it was time to hire someone. Here's what went into that decision, and it is all about math:
First, my new wife had a full time job which included our benefits. She wasn't making great money, but it was enough to live on and her opportunities were only going to grow. Not that we could support us and an employee on her salary, but it gave me a level of comfort to know there was a backup in place.
Next, business was growing. I had to spend less time "selling" because I was getting referrals and more work from my existing customers. Also, because I was providing training services for Binary Research, they were doing the selling for me. More billable hours for less selling time! If the graph is moving that way, you're going the right way.
Also, I was working more than I wanted to be. Weekends in a client's office and calls late at night. Traveling on Sundays. My life was being encroached upon. Should you be willing to bust ass and work hard? Yes. But you have to decide when too much is too much. I was reaching that point.
Finally, my customers were beginning to feel ignored. That can go on occasionally and they will understand, but it can't happen for long before you start to lose clients. If taking on a new client will negatively affect your relationships with your existing clients, or if you are turning away PROFITABLE work, then you are rapidly approaching the point of needing an employee.
You can afford to push your limits and client's limits for a while, and I encourage it in order to ensure the financial stability you need to hire. But really, the first hire should only be a math problem. Assuming you are charging the most you can in your market, you have some level of financial stability, and a reasonable forecast for growth, then you can do the following math problem:
If I make $100,000.00 annually and hire someone for $40,000.00, and don't increase sales, can I survive?
If I make $100,000.00 annually, and hire someone for $40,000.00, can I increase the amount of business I do by at least $60,000? (Figure salary plus 50% for true cost of an employee.)
If I make $100,000.00 annually, and hire someone for $40,000.00, can I increase the amount of business I do by at least $100,000?
If the answer to the first question is Yes, then you may really be considering a first hire, but without a plan for growth, or some major anticipated looming project, it's a bad idea. You are better off dropping a client or two to maintain the quality of your work. Don't hire!
If the answer to the second question is Yes, then you are actually in a position to hire, but to what benefit? Your salary and your new employee's are covered, but each employee, especially the first one, should represent an increase in BOTTOM line revenue. Paying someone $40,000.00 for a $40,000.00 project is bad math. I think this is one of the more damaging decisions people make because there are always expenses associated with employees that you don't foresee. And if sales dip, then you're back to question 1, and that's not a happy place to be.
If the answer to the third question is Yes, then you are ready to hire. In a small business, an employee should only be brought on if that hiring will increase the bottom line profit, and I think that amount should be at least equivalent to their annual salary, and preferably more.
If you can honestly do that math above - with whatever salary numbers are appropriate for you - then it's time to consider two more things. Are you personally ready for an employee, and who do you hire?