And the payroll cost led to the death of a company !

 

noun_164645_ccHave you ever wondered  why at the end of the month all your cash flow is exhausted? Does it ever happen that you are left with no money to pay yourself, as you have salaries to pay?

If you are being faced with such scenarios, chances are that you have to  face some difficult times ahead if these problems are not handled and rectified immediately.

There is rarely any strategy designed when it comes to hiring a team in a startup.Most start-ups start hiring people without a thorough understanding. Candidates are taken on an adhoc basis either to deal with the extra work pressure ,for a one off project that requires extra manpower or some reference case that cannot be refused. In doing so you harm the cash flow and profits of the company. In-fact, one of the major reasons for start-ups to fail is a bad team composition.

 

A  common phenomena that I see in a lot of start-ups is that the entrepreneurs often regret the hiring decision as  the employee  is not as per the expectation or  they are paid more than the skill set they possess.  This is even more damaging as with every wrong hire, the cost to the company increases.

Rarely do companies check their payroll cost in relation to their revenue . Most times companies go overboard with hiring, thereby increasing the percentage of their payroll cost. This gradually affects the profits of the company.

 

If your payroll cost is equal to or more than 50% of your  revenue than chances are that  you are struggling with keeping your company profitable. The trick is to walk the fine line between having enough employees to share the workload but not hire employees you don’t need.

 

The ideal payroll cost should be 30% of the revenues.  However, this varies from sector to sector. Manufacturing sector has to maintain a percentage between 10 -15%.

 

How do you ensure that you keep your payroll cost in check?

 

Hiring design 

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First and foremost, you need to have a proper design for the hiring process. Hiring is not a basic task that can be given to an intern to carry out. If not done in the right manner, it will cost you money, time and your company too. A high number of startups fail due to a lack of proper hiring design.

 

Figure out your payroll ratio

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If your payroll cost with relation to the revenue is more than your industry average then you need to rethink your hiring strategy. If you have just started to hire a team, estimate how much your company can afford to spend on salaries. This will help you to arrive at a number that you can hire vis-a- vis the company revenue.  If you do miss estimating this cost, chances are you will shoot way above the payroll cost resulting in a slow death of your company. As mentioned above, keep your payroll cost below 30%.

 

Study your best performers

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You don’t want to hire just about anyone. As a startup you want a candidate who is proactive and eager to learn and grow.  You want someone who fits right in your culture. This does not happen magically. Misfits will cost you money. So study your high performers and create their profile. This will help you in hiring the right kind of employees.

 

Design the hiring guide

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Yes. You heard it right. Design a hiring guide that will be the go- to book for anyone who’s   hiring for you. It should be more than a ready reckoner and should have a detailed design of your hiring needs.  The hiring guide should include answers to questions such as when to hire, whom to hire and how.  Most important question that you should have an answer to is Why you want to hire someone.

 

Without a proper hiring strategy and design, you will be weaving a trap for yourself where once trapped  the chances of failure are high. You created this company to scale greater heights and  not to tumble and fall because of a step that you missed taking.

 

Design. Develop. and hire. – be your mantra for building a team together.

 

Let me know your hiring experiences in the comments below.

 

Let’s create an idea culture.

Gauri.

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