Preface: Business is booming for John. He works almost all the time. He wants to spend less time working in his business and attend to some responsibilities outside work. What should John do?
Credit: Jacob M. Dietz, CPA
“Help Wanted.” Many businesses are hiring these days. Should you hire? If you hire, how will you pay the employee? That answer will vary from business to business and situation to situation, but a general understanding of possible pros and cons of employees, and how to pay for them, may help prevent the unpleasant circumstance of having an employee and wishing you did not have one. This article explores some of the reasons to hire, some of the ways to pay the cost of employees, and some of the advantages and disadvantages of hiring.
New Employee to Assist Owner
Pay new employee from current profits First, let’s look at hiring a first employee to assist an owner, and how to pay for him. Imagine John has his own business, a handyman services company. John travels to homes and fixes faucets, installs shelves, replaces showers, and many other services that homeowners like to outsource. John’s business is a single-member LLC, and he does all the work himself without any partners, subcontractors, or employees.
Business is booming for John, and he has more work than he can handle. He works almost all the time. He wants to spend less time working in his business and attend to some responsibilities outside work. What can John do?
One option is to hire his first employee to help him. If John hires a new employee, how will John pay for him? For John to pay the employee, the money needs to come from somewhere. If John is working significantly more hours than he wants to and is making significantly more income than he needs, then John may be able to keep the same volume of sales and just hire a part-time person to take some of the earnings and some of the hours. For example, if John would like to work 20 fewer hours per week, and has enough excess income to pay a part-timer, then he could hire a part-timer to work some of John’s hours so that John could work 20 fewer hours per week. This arrangement frees John up to focus on his other responsibilities.
It may be hard to find a part-timer who will do quality work for 20 hours per week. Also, some business owners may not have 20 hours of available work and the corresponding profits to hire a new employee. What can a business like that do?
Pay new employee by increasing sales Assume that John only wanted to cut his hours by 5 hours, and that the part-timer he hired wanted to work 25 hours. Based on John’s current earnings, he could only pay the new part-timer for 5 hours per week.
If John has sufficient working capital (short-term assets left over after subtracting short-term liabilities) in his business, and potential customers, then John may be able to hire the new part-timer and add new customers and projects to help pay for him. The new customers may not come in fast enough to immediately pay for the wages of the new employee, but John’s working capital, if it is sufficient, may help him get through those lean times of waiting to increase sales. It can be less stressful if John has sufficient working capital to draw on, and if he is realistic about how fast the new sales will come in. If John has no working capital on which to draw, and if the sales do not come in quickly, then John may find himself in the unpleasant circumstance of struggling to pay his employee and vendors.
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