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Posted at 10:20 AM ET, 04/23/2013

Advice: Overstaffing can break your small business — here’s how to know when to fire someone

Small business owners often have little time to develop strategies to effectively monitor their company’s financial health. As a result, many of them know what their company needs to survive, like how much revenue they need to cover payroll, but not what they need to thrive.


It may not be easy, but firing employees is often part of the job for small business owners, McLellan says. (Andrew Burton - GETTY IMAGES)
The difference between surviving and thriving often boils down to whether or not a business is overstaffed.

A company can be too lean, yet smart business owners always know the people they want to hire next. Training new employees every few months is a drain on your time and resources, yet carrying more overhead than your business can handle could also destroy your company.

You have to know how many people you need to power your company, when you need to grow, and when you have just the right number of employees. Tracking a few key metrics will show how much work needs to be done and how many people you need to do it.

Start by monitoring these three areas:

1. Keep track of your forward-thinking metrics

Most companies don’t have a steady income each month. If you have a comprehensive view of your financial landscape, you’ll be better equipped to weather the ebb and flow of cash flow.

Of course, you can’t react to every fluctuation — but you’ll be able to tell the difference between a seasonal slump and a significant downturn so that you can react quickly and intelligently.

Most firms’ incomes fluctuate dramatically throughout the year. Here are some basic metrics you should track:

• A long-range view of company cash flow. Start with a solid understanding of your industry’s standards and best practices, and then build a map of when your company’s income peaks.

• Accurate sales projections for the next 90, 120, and 180 days. Ideally, you should project even further out than that to know how much work will need to be done and how many people you need to do it.

2. Know your industry’s best practices — and use them.

Turn to consultants and associations that specialize in your industry. Know the common ratio of income and overhead to employees for businesses similar to yours.

For example, in the advertising agency world, the industry standard is a 55-25-20 ratio — meaning 55 percent of your adjusted gross income should be spent on salaries and benefits and 25 percent on overhead, which leaves 20 percent for profits.

Every industry has its own profit margins, sales cycles, average employee wages, and more. Knowledge is power, and by operating within metrics like these, you will never be overstaffed.

3. Create an active, aggressive new business program

It’s easier to justify keeping an employee when you know there’s a new client in the pipeline. On the other hand, it’s dangerous to keep an employee if you’re not sure when you’ll make your next big sale.

If there isn’t enough work for them to do, there’s no sign there will be enough in 90 days, and if the metrics above aren’t being met, fire them. Make a vigorous, dynamic new business plan a part of your everyday work, and you’ll always know when it’s the best time to hire.

Putting the right priorities first

The next point sounds obvious — put the business first. But when it comes to staffing, many small business owners have trouble adhering to that principle.

Employers are rarely guilty of firing too soon, but they’re often guilty of waiting too long to let someone go. And sometimes, this can do more than just cause a dent in your bank account. It’s hard to let a good performer go simply because you don’t have enough work for them to do; but unfortunately, it’s part of business ownership.

Remove emotions from the equation by objectively evaluating the financial health of your business. Examine your cash flow, financial reserves, and new business prospects to paint a realistic picture about how long you can afford to retain an employee.

Set a definitive “drop-dead date” with metrics so you know exactly what you need to earn to avoid pulling the trigger and exactly when you will have to let the employee go. To prepare for the worst-case scenario, always know which employees you would have to let go and have a plan ahead of time to replace their skill sets.

While much of a small company’s success can be attributed to the owner’s natural skill, how and when he hires or cuts staff shouldn’t be an instinctive call. Before you hire or fire, these are the numbers to know:

• Cash: How long can you bankroll an inflated payroll?

• Prospects: How close are they to buying?

• Sales cycle: How soon is your industry’s “season”?

• Availability: If you fire an employee, what would be the impact on the rest of your staff and your existing work?

Don’t sacrifice your business: Staff intelligently, strategically, and with a clear view of your company’s future. You’ll be able to deliver a better product today — and you’ll know that you’re prepared for tomorrow’s challenges, too.

Drew McLellan runs the the Agency Management Roundtable, which advises small and mid-sized advertising agencies on ways to grow their businesses. Before that, he owned McLellan Marketing Group.

By Drew McLellan  |  10:20 AM ET, 04/23/2013

Tags:  small business, economy, hiring, jobs, business

 
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