One time I was helping a small business owner who was going through a rough time with her business. It was leaking cash, she was taking almost nothing out for herself, and she was burned out.
Her business only took in about $50,000, but somehow she had two employees working for her. That was where most of her money was going.
My first, and really my only, question was: why do you need employees at all?
I see this time and time again. Businesses that are in no position financially to afford employees … hire employees. And then they struggle with cash flow, and oftentimes fall hopelessly behind on making their tax deposits with the government.
Yet, a suggestion that perhaps the owner cut back on the number of employees and (gasp!) take on more of the work themselves is met with shock and horror that I would be suggesting such a thing.
Another time, I was working with a client who had a seasonal business. He kept his employee on payroll during the off-season at full wages. Then he wondered why his bank account reached $0 and he had to borrow money from his ex-girlfriend to stay afloat. My suggestion that he perhaps lay off the employee during the offseason, or at least cut the employee’s wages, was again met with shock and horror.
(As a somewhat-humorous aside, the employee was also the owner’s new girlfriend, so that might have clouded his thinking.)
The Two Biggest Considerations I Point Out When Thinking About Hiring Employees
There are two things I ask any business considering hiring employees:
- Can you afford to consistently pay employees? And,
- Can you afford the payroll taxes?
If the answer to either one of these questions is no, this is a signal that the business owner needs to stop what they’re doing and go back to the drawing board.
And usually, it’s #2 that’s the issue. It comes time to make the tax deposit, and the money isn’t there. So the taxes don’t get paid, but instead of immediately stopping what they’re doing and re-evaluating the situation, the owner just keeps charging ahead while falling further and further behind on payroll taxes.
Look Before You Leap
I used to say hiring employees was the single worst thing a small business could do. I have since amended that statement because it’s not accurate. Hiring employees is great, as long as you know what you’re getting into, you can pay the employees consistently, and you can afford the payroll taxes.
I encourage my clients to avoid hiring until their new venture is stable and can really afford not just the wages but tax responsibility. Many of my clients like to get ahead of themselves!
Yep, that happens with my clients too. They hire employees without consulting me or understanding the implications, and then find themselves in way over their heads.