A small business owner recently asked Neighborhood Notes, “What do I need to do to hire my first employee?”
We began to answer that question by talking to several small business owners who have already hired their first, and in some cases second, third and more, employee. Simply enough, we asked: “How do you know when it’s time to hire your first employee?”
The responses were insightful, full of realizations and real-world experience, but when we asked business owners: “How do you value your time?” Everyone was inevitably stumped. Most said something along the lines of: “Well, it’s difficult to put a definitive value on my time.”
While business owners were able to realize the areas where their time was most effectively and most profitably spent, they did not necessarily know how to assign a dollar value to that time.
That’s where Bill Horton, a small business coach at BizFix and educator for Mercy Corps NW, comes in, counseling that it’s absolutely necessary for business owners to put a value on their time.
Horton outlines the following list of questions:
- Time to put a number to an hour of your time. Would you value your time between $50-100 per hour?
- What else could you focus on if you hired someone for $15-20 per hour to do some of your tasks?
- What tasks would you like to take off your plate?
What’s the Value of Your Time?
If you can't value your time, how can you price your product?
"If you can’t value your time, how are you able to price your product?” Horton asks. “If you're not sure how much your time is worth, how are you able to tell me that bag costs this much?"
And to take that one step further, Horton insists, "For you to be able to cover your living expenses and your business expenses, you have to know how many hours you have to work a month, and... how much are you getting paid for that hour."
While Jennifer Thomas of Jet Clothing, who employs nine (herself and her business partner included), admits that it is still hard to assess the value of her time, she was able to determine how much she needed to pay herself and her partner by asking, “What do we need to live off of?”
The answer to that question is the salary that she and her partner receive, and being conscious of this figure (plus the combined salaries of her employees) has in turn allowed Thomas to price her clothing with more certainty and rationality.
“We do charge for our product to be produced locally,” Thomas says. “We believe in creating living wage jobs as part of our equation,” and she says that her customers understand this cost because they know that the products are quality and support local individuals.
How Do You Put A Dollar Amount To Your Time?
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The easiest way to do this is to figure out the value of your products or service.
If you are a small business owner, your business is likely your life and livelihood, for yourself and your family. How much do you need to make to cover your expenses—both living and business? What would you like to make?
Horton says that business owners usually undervalue their time.
According to Horton, if you pay yourself $25 an hour, the question isn't how many hours you work a week, it's how many hours you work generating revenue. That is the key to valuing your time. You may work 40 hours a week, but only 18 of those hours may be generating revenue. And during those 18 hours, you need to generate more revenue per hour to cover your business expenses. Given that, $50 or $75 an hour is a more appropriate rate. It's likely this is a new way for you to think about your time, but when you do, it is often easier to justify hiring an employee at $15, thus freeing you to focus what you do best, which often generates the most revenue.
Figuring out the value of your product or service will actually allow you to better price your offerings.
"It's really important you know how much your product or service costs and that you price it correctly,” Horton says, “because then you can actually be confident when you tell your customer how much it costs. And you don't have to negotiate on price."
Assessment: Cost-Benefit Analysis
Now that you’ve determined a dollar value for an hour of your time, you can do a simple cost-benefit analysis of hiring your first employee.
While you may not be able to determine how much you can increase revenues by hiring an employee, try to temper your trepidation by considering specific, added benefits, like being able to increase store hours and production, or even the ability to take a day off for yourself.
A simple pros and cons list may help you realize some of the areas where you could use help or better utilize your time. You can also estimate the increase in sales needed to cover the cost of an employee. The following spreadsheet, courtesy of Kevin Ohanesian, a CPA and president of Portland Payroll, can help you estimate the needed increase in sales before making your decision.
Using the below example (or create your own by downloading this blank spreadsheet), you can determine the minimum increase in sales needed to cover the cost of your new employee while still maintaining your gross margin.
Ohanesian notes that if you work in a serviced-based business, you can modify this by using:
a. Total monthly cost of the employee: $XXXX
b: Hourly rate you will bill your client: $XX
c: Hours of billable time each month needed to break even (a divided by b)
The final number in the above examples can be used to help you set your sales goal, because having a clear target will help you achieve it.
While it may be obvious what tasks you’d like to take off your plate, it may not be so obvious how much you’re able to pay for those tasks. We hope the above analytical sample will give you an idea of what to expect before hiring your first employee.
Neighborhood Notes will continue this series with one final installment where we’ll provide all the legal and technical resources that you’ll need to hire your first employee.
