Create a Hiring Budget
We're gonna create our hiring budget. Now, how do we actually do that? What does that actually look like? Well, payroll is generally about 50 percent of your total revenue. A great resource for this is the "Profit First" book. Lots of people know and love "Profit First". If you're not familiar with it, you could check it out. Maybe, you don't even need to necessarily read the book, there are so many great resources online, but I would highly recommend really diving into it. I'm gonna be kind of talking around it a little bit, so that we don't get too far into the nitty gritty, because it changes a lot on just a per-business basis. But this guideline comes from there, and also, it's just really true. Based on a lot of research that Mike Michalowicz did on businesses in all different spectrums. So payroll is generally about 50 percent of total revenue. So the first way you can start calculating your hiring budget is a more conservative way to do it, and that means working backwards. In o...
ther words, starting with real numbers, real math, from previous years. The last year, your actual expenses, things like that, and working backward, to figure out how much you have left over to pay someone else. And then we're gonna look at it working forwards, in a more aggressive calculation, where you can start creating a hiring budget based on what you anticipate earning with extra help. And I have a feeling what you're gonna decide is somewhere in between, and that's probably what I would recommend, but you can kinda know for yourself, what's my risk tolerance, how comfortable do I feel with this, and go one way or the other, okay? So we're gonna use just some real basic numbers, and then if you guys wanna get into your own numbers, I'm happy to talk about that as well. I don't wanna put anyone on the spot, (laughs) for what you wanna pay yourself and all of that good stuff. So let's just say you earned 300,000 dollars last year. We're gonna start with a nice number that gives us something left over. I know that number might be high for some of you, but it's a nice number to shoot for. Okay. so if you earned 300,000 dollars last year, what does that give you left over, in terms of your hiring budget? 150, right. 150,000. Alright, so this is total revenue. Whoops, I'm gonna switch to this side, sorry, camera people. Total revenue, and this is 50 percent of total revenue. What do you need to pay yourself? Let's say you need to pay yourself 75,000 dollars a year. That's what pays your bills, that's what pays your mortgage, that's what puts your kids through college, whatever it might be, it's 75,000 dollars. Now, well, actually, we'll adjust that in just a second. What's left over from that is another 75,000 dollars, right? So that gives you 75,000 dollars to hire another full-time person, two full-time people, a full-time person and some part-time people, but this is a nice chunk of change to work with, right? And then that still gives you another 150,0000 dollars to do operational expenses, overhead, and, you know, taxes are gonna come out of that, and maybe your profit is gonna come out of that as well. Now, maybe, as we were also just discussing, maybe you need 75,000 dollars a year, but really a more appropriate salary for you is maybe 60,000 dollars a year. That looks like another six. 60,000, which gives you 15, that you are gonna assume you can take as a profit draw, okay? And that's gonna actually bump you up here, to 90,000, right? Did I do that right? Yeah. (laughs) Does that make sense? Are you following? Okay, cool. So, 300.000 is probably more than a lot of you are generating in revenue every year, but I think you could see pretty quickly how when you're earning 300,000, there's a lot of room left over for hiring some pretty bad-ass people, right? I don't know if I'm allowed to say that on Creative Live, but I just did. (laughs) And so you've got a lot of room to play with, here. Who could you hire for 90,000 dollars, to help you move your business forward? You could hire a full-time person, at 50,000 dollars a year, and a few part-time people. You could hire a 50, and a 40,000 dollar a year full-time person. What would it be like to have two full-time people working with you on your business? Let me tell you, it's amazing. It's amazing! Okay. So let's just take another example here real quick, and look at actually 100,000 dollars, which is maybe a little bit more, feels a little bit more comfortable to more people. So what do you need to pay yourself on that? Or, your total, this is gonna get real confusing real fast, I'm sorry. But it's for my benefit actually, not yours. So I can keep track. So your total payroll then is 50,000 dollars. And this is payroll, not profit, rght? There's profit here that you can have too, so don't think ooh, gosh, I need that all for myself. Maybe you need most of it for yourself, let's say you need to pay yourself 40,000 dollars on that, and then you're gonna assume, again, that you can take another profit draw around 10,000 dollars. Don't quote me on these things, I'm trying to give you the big picture. This is something you would work with, with your accountant as well. And then, what's left over, is 10,000 dollars for hiring. Now, 10,000 dollars may not seem like a lot, but you could at least get a part-time employee for that. You could get some contractors that work with you on retainer for that. But it does add up, and it can add up very quickly, if you're feeling a little bit more on the conservative side with your math. Beryl, you had your hand up. I was just gonna ask where contractors come out of this, if it comes out of that half that is the paying yourself side, or the payroll side, or if it comes out of the expense side. More times than not, I would take it out of the payroll side. Okay. Yeah. That was my same question, because I've always, I love "Profit First" and that number's really helped me, but I always put my contractors in my expenses, and then I'm always way over on my expenses. Oh. That's how he talks about it in the book? Yeah. I'm loving thinking about it this way. But you could put all your contractors and your employees on your payroll side, and think about them from that chunk, and it might be that when you play around with your percentages, using the "Profit First" model, that instead of making it 50 percent, you realize, you know what? My payroll's more like 55 percent. And then you adjust your percentages. But my expenses would be a lot lower. I'm always, like, way over the 30 percent expenses, I always blow that out, because I'm putting all my contractors there. Yeah. My understanding with "Profit First" is that the way he's talking about contractors is not so much the way you guys tend to use contractors.
That makes sense. They're using contractors in a way that it's like, no, this is an actual expense on this particular job that we're doing.
Like a one-off. Yeah, or like I'm outsourcing this thing. If you're outsourcing something that may be more of an expense on a particular project, whereas the way I see you guys using contractors, let's say, a contract virtual assistant. That's payroll.
Yeah, that makes total sense, yeah. The way I see it, anyway. There's room for interpretation here. This is more about like, I'm gonna work through these numbers, and I'm gonna figure this stuff out. Beryl? Okay, so like a designer for a one time client project may come out of the expense side. Right. But a VA that you're hiring to do a job, On a regular basis. Would be on the payroll side. Exactly, exactly. Or let's say you hire a marketing agency to work with you on a monthly basis, and they're the team member who is in charge of marketing. I personally would take that out of payroll. Make sense? Yes. Cool. So that's working backwards. That's saying, alright, here's what I expect, because that's what I've done before, and trying to get ahead based on what you've done before. Works if you're more conservative, you're probably not gonna grow as fast, but that's great, for people with a lower risk tolerance. There is nothing wrong with being conservative financially in that way, or in any way. (laughs) But there's another way that you can work on this, let me move my slide up. You can work forward, which is more aggressive. And in that way, we're budgeting based off of projections, as opposed to what you've done previously. We are on the far other side of the spectrum now, we are well into the territory of "I don't actually know what's going to happen, "but I think this is what's going to happen." So let's say your projected earnings are, say your projected earnings are 400,000 dollars now. You want to make 400,000 dollars. You have a plan for making 400,000 dollars next year in your business. Your business has a plan for making 400,000 dollars, not you. What do you want to pay yourself? Well, you may want to pay yourself on that, 100,000 dollars, and that's your salary, right? Doesn't include the profit leftover, that's your salary. So what's left, so 200,000 is our 50 percent. What's left again is 200,000, no, is 100,000, you didn't see that, is 100,000 dollars. Again, that could be multiple full-time people, it could be a full-time person and a whole bunch of part-timers, but there's lots of room to play here. Now, what you're gonna notice is that you don't have 400,000 dollars now, right? You may not even have the cash flow for 400,000, to budget in that way. And so that's when then you start using some of that profit that you may be used to allocating to yourself, you know, just taking whatever's left over, and you allocate it ahead of time to the people that you're hiring. And this is one of the things that we're doing right now, is I'm actually paying myself less right now, because I'm hiring based more off of projections, I'm budgeting more off of projections than on reality. Because I feel pretty-- and not exclusively based on this, I'm looking at cash flow, and I'm measuring projections versus cash flow, so that I can see, okay, this is what I'm comfortable going in, I'm comfortable working ahead of myself, but not too far ahead of myself. Whereas I know, with a little bit of work, I can make that up even if my projections don't come true, right? And so I'm buying myself more employees, so that I can actually hit my projections. Because what a lot of you started thinking about yesterday is the company that I need to achieve my mission, to achieve my vision, is not the company that I have now, and I can't have that company with the cash flow that I have now, and with the earnings that I have right now, right? So how do you get there? You have to work ahead, at some point. You have to be willing to sacrifice some of your profit draws. Maybe you have to be willing to sacrifice some of your salary, or just hold yourself out. A couple of people said, you know, I don't really feel comfortable paying myself right now, because I have all these other expenses. And that is part of the game, if you're going to bootstrap or self-fund a company. The way other businesses get around this, of course, here, in San Francisco, and many other places around the world, is taking venture capital, or taking outside investment. And so that investment, then, is toward working toward projected earnings, so that you can hire the people you need to actually get there, so that then those investors get a return on their investment when you hit those numbers, or well beyond. Does that make sense? It is a little uncomfortable, honestly, but as I know, as my team is watching right now (laughs), it's a little uncomfortable sometimes, to switch up how you've been working, and to say, you know, I'm gonna take a little bit less, and I'm gonna plow ahead a little bit more. But often, you don't have a foreseeable way to build what you want to build without taking that jump. And there is a lot of entrepreneurship, a lot of small business ownership that is about taking the leap. It's about working ahead a little bit, taking the bet, right? Are you willing to bet on yourself? Are you willing to bet on the people you hire? Are you willing to bet on your vision and your mission? And so, when we talk about the finances, we're not really, we are talking about the numbers, but we're also talking about this decision to say yeah, I believe enough in myself, I believe enough in my vision, to go after it. It's a big, scary part of hiring, but it's awesome. Questions? Alright, no questions?
I wanna, like, grab a calculator right now. (laughter) Do you wanna work through anything with us? I could try. Okay. Let's do it. Do you mind talking about real numbers? Not at all. Yes! I think I used to put people more on the spot with the money stuff than I'm comfortable doing right now. Alright, so are you feeling more aggressive, or are you feeling more conservative? Let's go aggressive, I wanna do the projected earnings. Alright, so tell us a little bit more. You've had time to think about what this company is that you're building. Tell us a little bit about that first, and then tell us what you think that company can earn in 2018. Like tell you what my vision is? Yeah. Like, what do you see your company looking like by the end of 2018? Wait, I wanna go back on agreeing to this now. (laughter)
Excellent! No! No, I just, you know, everything, all the exercises that we went through yesterday, especially actually thinking through team, really almost helped me reverse engineer. I was having a harder time at the beginning of the day, thinking, like, okay, what really is my vision? Especially because I had made some shifts in my business recently. So then I was a little bit, at the very beginning, I was like, I don't even know! But then once I got to, like, oh, wow, if I had a person that could do this, imagine what I could provide if I have a person that could do this.
Alright, so tell us a little bit more about those teams. So I think, you know, like I said yesterday or earlier, I really feel like having that member services, having that kind of customer service, not quite customer service, but just someone that can be a little bit in a mentor role, but that can just really make the experience of working with me that much richer, especially because I'm running kind of a group program. Okay, we might call that a client success manager.
Love it, write that down. I'm gonna write that down.
I'm taking that exactly. Like, and I think, I love that, I am absolutely using that. That's exactly who I wanna hire, a client success manager.
Good, you're ahead of the next lesson now, too. Great. (laughs) Yeah, so I think, you know, then once I have that person in place, then I'm able to grow my group program bigger, because I'm not the client success manager, I am just delivering the value. Yeah, okay, actually, let's pause right there, because this is perfect. How many people do you have the capacity to take in your group program right now? I feel like between 12 and 16.
Okay. That I can really manage. If you had a client success manager who worked for you half-time, 20 hours a week, how many people could you take in your program? Probably double that, probably 30.
Okay. Yeah. Because already, I'm thinking of ways that I could do different pods, and different groups, because I wouldn't be the one managing all of that. Yeah, exactly, exactly. Alright. Anyone else that you're thinking about hiring by the end of 2018? Well, I'd love to do, I'd love to have someone more in the sales role.
Okay. But I don't even know what that would look like right now.
Okay. But to help me get, it's kind of like one is, like one person to help me get to those 30 clients, and then one person to help me serve those 30 clients. Yeah. I think the order in which you're thinking about things is the right order, create the capacity first.
Great. Because one of the things that I see with small business owners is they actually self-sabotage on the path to growth, because they know internally that they don't have the capacity to support the amount of customers they think they can sell. And so they end up sabotaging the sales process, not going all in, not doing the marketing that they should, not putting the time in, not thinking strategically about it, and then they get in this cycle of, well, I'm capping out right here. So build the capacity first, and then add in the salesperson. And they can happen relatively fast together, but I like that you're thinking in that order. Anything else, in terms of... So you're thinking like three of you? Yeah. Well, yeah, and then I've got admin support, and yeah. Sales, admin, I feel like there was somebody, oh, you said you had a content manager.
I have a content manager. Is, I mean, you don't have to fire her right now, but... Well, I'm almost, right... (laughter) You're not getting fired, you're not getting fired! I am totally kidding! Totally kidding! But I almost may be moving her into...
Oh, yes! Client success manager.
That makes a lot of sense. Yeah. We're gonna talk about checking out the talent later. Because I love checking me some talent. Okay, cool. So, this is great. This looks like a phenomenal team, a nice little company you've got started here. How much revenue can this company generate in 2018? 300,000. Beautiful. Alright, so Megan is committing to finding a path to 300,000 dollars in 2018. Alright, about how much cash flow do you have? Do you have money that's just sort of up for grabs right now in your monthly cash flow, or is it all allocated someplace specifically? Right now, it's all pretty much allocated. Okay. Where could you draw from, to start working ahead, because we've already run these numbers for 300,000. So what are you paying your, whoops, I've got a blank piece of paper. What are you paying yourself, or what do you want to pay yourself, from that 300,000 dollars? Especially using then also the profit, I think if my salary were at that 60...
60? Mm-hmm. Okay, so Megan's gonna take 60 of this, plus profit draw. We don't want your husband to get nervous, right?
Right, right. So, 60,000 plus profit. So that leaves us with, we've got 150,000 here to play with. So we've got 90,000 left over for everybody else. How much, I mentioned half-time for this role. Do you think that's appropriate?
Yeah. Okay, and how much are you thinking about paying that person per hour? I don't know, because I also, and this is something, I feel like a lot of us are in contractor roles, where maybe we are paying a higher hourly rate.
Yes. And I feel like, if you hire someone in more of the employee capacity, I mean, tell me if I'm wrong, but I feel like their hourly rate might go down a little bit.
Yes. What they are taking home is bigger, you know, they may be getting paid more total. Yeah. Then this is what drives me crazy, when people say they can't afford employees. Because they're considering paying their employees the same thing that we've gotten used to paying contractors. You pay contractors a very high hourly rate, because the idea of a contractor, and we'll talk more with Patrice Perkins, who's a lawyer, about this in the next session. But the way a contractor is supposed to work is they bring their specialty into your business, and they help you do one very specific thing. But that's not how a lot of you are working with your contractors, right? Especially virtual assistants. And so, there are virtual assistants who make 20 dollars an hour, but there are a lot of virtual assistants who make 50, 60, 70, 80, and I am sorry for what I have contributed to telling people to get paid what they're worth over the years, and the exorbitant prices that some people are charging, but how can you actually utilize ongoing support at 80 dollars an hour? You don't need to, would you pay someone to do those things a salary of 120,000 dollars a year? Because that's what you're saying. That's not a 120,000 dollar a year role. You're paying yourself 60.
Right. That's a 30,000 dollar a year role, right? And so, if they're half-time, well, okay, this person is maybe not a 30,000 dollar. Maybe this is a 45,000 dollar a year role. And so that's 23,000, so it's a little less than a thousand dollars a month.
And going back to my values, and how I wanna help other women have, like, the whole job creation, and the idea that I could pay someone 23,000 a year for a part-time job is amazing. Yeah! With a flexible schedule, that they get to do from home, that's meaningful work. Now you're gonna pay a little bit more than this business-wise, because there is going to be some employment taxes, payroll taxes that you pay on top of that, which you don't have for contractors, right? But this is, 45,000 dollars a year, the equivalent of a 45,000 dollar a year job, that's a good job, right? There are so many places around the country where that is a really good paying job. And so I really want, and I think we'll probably end up talking about this a little bit more in some of the next sessions, but I want everyone to start wrapping their head around the idea that it is not only, that you not only get more support from an employee, but that it may be more cost-effective for your business, to hire an employee. Well, and efficiency, too, because if you have them for more hours, now you're not that contract client, like, oh yeah, I can get back to your project next Wednesday, because I've got 12 other clients that I'm doing projects for. Exactly, exactly, so you're paying that VA say 50 dollars an hour, and you're one of five clients, because they've gotta pay the bills too, so you get them for like five hours a week, and they slot you in when they have time, right? And you can't do anything about that, legally speaking. Again, we'll talk to Patrice about these things. All you can do is set the expectation that a certain amount of work gets done. With this person, you can say, I need you to be available for this phone call, this phone call, this phone call, and then we're gonna have a schedule where you're co-working with the rest of our clients two hours a day, five days a week. You might not run it like that, but you could, right? You could say, I need you to be available from 12 to 2, Monday through Friday, for these three weeks while we go through this intensive support program. How amazing would that be? Let me tell you, it's amazing. Yeah. It's amazing. So, if you're only paying this person 23,000 dollars a year, you've got a lot more money left over. Where are you gonna spend that? Well, because I was more thinking like, okay, how do I start, you know, because I'm not making that. Now, I'm not making that right now, I'm making like half of that. Right, okay, yes. But let's be clear here, you don't need 23,000 dollars to hire this person, right? You need to be able to say, I can pay about a thousand dollars a month. Where are you gonna find a thousand dollars a month now? Yeah, it's not that much more than I'm paying. Exactly! (laughs) Exactly! That's another thing, like we're really getting into where all the hangups are right now. We look at this number, and we're like, oh god, I don't have 23,000 dollars. You don't need 23,000, you don't need someone's salary to be able to hire them. You need to be able to say, alright, over the next six months, or over the next three months, I can cover that monthly salary. I know where I can make that money from. Maybe I take on an extra client, maybe I give up that money, my own part of the payroll for that month, but I know where I can find that money for this amount of time, and by the time that window is over, I know that person can be helping me make more money, right? So if you could move this person into part-time, and have them working for you 20 hours a week, how long is it gonna take until you can start onboarding 30 clients? Probably not very long. And now, you're in the swing where that very small extra expense is helping you make a lot more money. Do you guys see how that works? Any questions about that? I just wanna say one more time, when we're talking about hiring people, we are generally not talking about making a huge investment upfront. We're talking about making an incremental investment for a small period of time, to get us to that next level. And then, yeah, you might reevaluate and say, okay, now I need another two people, and I'm gonna keep it going for another six months, where I'm taking a little bit less or I'm working a little bit harder, but you see it in little jumps, instead of, oh god, I gotta find 23,000 dollars somewhere.
Or I have to find 90,000. Or I have to find 90,000 dollars somewhere, yeah. And so, again, yeah, you can say, alright, my budget for 2018 is going to be 90,000 dollars. I'm gonna start with this person, which requires me spending an extra few hundred dollars a month, and maybe a little bit more paperwork off the bat, and then I'm gonna add on the next person, and the next person, and the next person, until you've got your little team around you, and y'all are working really efficiently, you're talking to each other, and you feel supported all the time, and most importantly, you've got a cohort of clients who has never been taken better care of. Because they're also not subject to your contractors being available. Make sense? Questions about that? No, I think we had a couple of questions from online, let's go ahead and bring those up. Travis says, "How much revenue should I have "in relation to the cost of hiring, "or how much savings should I have in place? "Let's say I bring in 100,000 dollars per year "and intend to hire at 30,000 to double my revenue." Okay, so, Travis, hopefully Megan's example here just completely talked you through that, because that's, your scenario there is exactly what we're talking about here. Don't look at that 30,000 dollar number, I mean, have that in mind, I love that you're saying, this is what I'm gonna budget, that's a great place to start. But then, realize what that's gonna look like for one hire for one month, or three months, or six months, and figure out the combination of cash flow and savings that you wanna have to make you comfortable making that leap to hire that first person. Once you get that first hire under your belt, then you can look at where you're gonna find the money for the second one, and the third one, and the fourth one, and however many you want to hire. But yeah, so Megan's example, it's different numbers, but it's exactly the same kind of scenario. It's a process, really, of looking at the overall budget, looking at what you're going to pay somebody based on that overall budget, and then looking at that, what the real cost of that is for you per month, and then coming up with either the cashflow or the savings that's going to allow you to do that, and I think for most of us, that's probably gonna be a little bit of both. Like I mentioned earlier, I like to have a nice big business savings account, it makes me feel very comfortable and confident. I know if something bad happens or if I have a big opportunity, I can take care of it. It also makes me know that I can take care of my employees, should something happen. Either should something happen to them, or should something happen to the business, I feel really comfortable being able to say, I'm not gonna leave anybody high and dry. Cool? Next one? Ooh, another Tara: "How can I commit to hiring someone "if my income is only based upon being hired, "booking weddings? I don't have consistent income. "Example: I make a ton of money in May and June "and September and October, but have nothing coming in "in January or April, for example." So that's a really common scenario, Tara, and I think the key for this is starting to look at your year as a whole, as opposed to just seasonally. I think wedding photographers, especially, tend to look in seasons, right, because you are working so hard over the course of eight weeks, or 12 weeks, or 16 weeks, and then not-- not "not working at all", but you know, you're busy editing photos and processing in that downtime, or maybe doing meetings with clients who could book with you in the next season, and you know, really start actually allocating that money out to yourself over a period of 12 months, and that goes back to that paying a consistent salary piece. Paying yourself a consistent salary. So how can you commit to hiring someone when you are seasonal? You commit to hiring yourself first, as an employee that gets paid consistently over 12 months, and then you look to how you could do that for someone else. Now, that also might mean that you make seasonal hires. Maybe you hire someone for four months, and then they get laid off, and you hire either them or someone else again. There's a lot of seasonal businesses that work like that. You know, landscaping is one, where landscaping companies hire everybody in April or May, they work through the summer, and then they get laid off, and a lot of them go back to the same companies. Now, there's some legal things in there that you might need to consider, and I would talk to a lawyer and your accountant about hiring seasonally like that, and maybe this is a great opportunity to actually hire contractors, right? Like, I don't know that you want a second shooter on your payroll-payroll, but for each wedding you have a second shooter, and that's allocated out of that budget. So that's another way that you can think about it as well. I don't want anyone to get the impression that I am against hiring contract labor. I am absolutely not against it. What I'm against is the ruts that we get ourselves in, in this small business world, where we think we can't hire based on our previous experiences, some of which have varying levels of legality around contract labor. So I just, I want everyone to be really clear on what is the best way to hire for them. And we will get into that a lot more with Patrice, coming up in the next session, that's one thing we're gonna definitely, definitely talk about.