Like so many businesses out there, Big Bang essentially started in my house. As an independent consultant, I did database development, ISO-9000 training, as well as the odd training work for companies like CompUSA and Binary Research. If my wife came home at night and I was still in my robe, she knew I'd been working that day.
How a business grows from there generally takes one of two paths - small organic growth, or funded rapid growth. I chose the organic path, and it's worked well for me. After eight years in business, Big Bang does a few million a year in sales and has fourteen employees. We have a five acre campus, with a putting green and tee box, sand volleyball court, and a recently added disc golf course. We grill out in the summer for lunch and hang out on the patio after hours with cold beer and drinks. We have actually been profitable every year. I can't begin to explain how much I enjoy what I do and who I work with.
However, I'd be lying if I didn't say I occasionally thought about what Big Bang could have done with venture capital. Would we have become the next Facebook? Not likely at all. But, could we be doing tens or hundreds of millions in sales? Potentially. But at what cost? Would I even still be here? What about the staff? Would they be here too, or would the appeal of cashing out stock options have been too tempting? It's both exciting and daunting to consider.
Regardless of the path taken though - slow and steady, or meteoric - the path to smart business is not dramatically different. And what I mean by that, is be conservative.
When it became time to move from the house to an office, I elected to sublease two offices from a law firm I did business with. Now that obviously didn't leave much room for growth, but remember, adding that first employee was a 100% increase in staffing! That's huge. It gave me the opportunity to learn about business outside the house - about employees, phone and internet bills, liability insurance, etc. The risk was minimal, and I think that's something business owners don't always take into consideration. We're supposed to be these aggressive, passionate, mavericks, when in reality, we're far more conservative than most would ever expect.
As Big Bang and the UIU grew, we moved our offices from the subleased rooms to a 3500 square foot office... in the same building. Nothing crazy, but it accommodated the four of us (another 100% increase!) and gave us room to grow to eight people, and have room for our testing equipment and lab. Here was a bigger jump, but the decision needed to be weighed against our growth. Now, did we still buy our desks from Office Max or Office Depot and have to put them together ourselves? Absolutely. The conference room table and chairs? Scavenged from my father's storage unit because he moved his business. Risky at $5000.00 plus per month for rent? Somewhat, but not much in comparison to the revenue of the company. The greater risk was stagnating the business.
Eventually we moved again, this time to our five acre campus with an office building that could accommodate another 100% increase in staff... which we're quickly approaching. And it was the conservative decision. While admittedly we've put a tremendous amount of money into the property, we didn't have to right away, and our loan payment is less that our former lease. So, while the million dollar loan might seem outrageous and frightening, the day-to-day math proved to be an easy decision. Less money being paid for twice the space and an awesome environment. Wild and crazy appearing from the outside, but actually very conservative. Could we have gone bigger and more expensive? Yes, according to the bank. Should we have? Absolutely not.
Where I'm not conservative though, is with my employees. They are the lifeblood of the company, and while I can nickel and dime on desks and chairs, I refuse too with the employees. We generally pay at the high end of the scale. Our benefits are second to none. Keeping these people, and keeping them happy is what allows Big Bang to thrive, not just survive. Spending a couple hundred extra dollars for a bigger, better monitor, or dual monitors, is a no-brainer. And because we're willing to do that, they're that much more productive, which makes Big Bang more profitable, which leads to the disc golf course in the back yard.
There is no easy answer to how to price your goods and services. There are so many factors to consider and questions to ponder, that it can be incredibly frustrating, for both you and your clients. Even if you get it right, you may still not have it right! And as the business grows from one to many, that pricing that was correct once upon a time, may no longer apply.
When working as an independent consultant, pricing becomes a very personal and philosophical issue. I made approximately $35,000 annually when I left FedEx in 1999. Simple math says I made about $18.00/hr, although it was slightly less because my annual number included overtime. So, let's say $16.00/hr. If I charged that to my customers as an independent consultant, I'd have lost my apartment, car, girlfriend, and likely a lot of weight. Even double that number would not have come close to my annual salary.
Here are a few of the factors to consider relating to billing rates as an independent.
- Taxes: As an employee, your taxes are taken out automatically and you never see that money. In addition to that, there are the employer paid taxes that need to be added - Employer social security and Medicare add about 9% to the bill, and you're still responsible for paying it for yourself as the employer.
- Benefits: Whether it's vacation pay or health insurance, the benefits an employee receives will generally add up to about half the actually salary. In our example, probably another $8.00/hr on average. And the higher the salary, the higher the number, but the 50% is almost always a good number to use.
- Business expenses: To begin with, this may just be a second phone line and business cards. Eventually, it will include some level of advertising, a web site, perhaps even an office, equipment, travel, inventory, etc. I suggest staying as small and basic as possible, but realize, that can change very quickly. The first large contract may change your entire universe.
So, a $35,000 salary, will cost probably $50,000, plus expenses. Even being incredibly conservative, $25,000 the first year is fair. So, let's say that $75,000 in revenue may allow you to maintain your existing lifestyle.
Now that you've established a number, the next challenge is determining how much work you can actually do... and bill for. Generally speaking, 2000 hours is the number used for hours worked per year, so the $75,000 in sales would require a billing rate of $38.50. Easy!
However, some of the time you are going to be selling, not working billable hours. Some time you will be traveling. Do you bill for that? Are travel expenses billed separately to the customer? That billing rate also assumes you always have work to do when not selling. What if it's a bit dry for a couple weeks? You don't get to charge your customer's overtime on the next job when you are willing and able to work 60 hrs/week.
My estimate is that, at most, as an independent, you will be able to actually bill for 1000 hours in a year. Get the right contract, and maybe that number goes up, but it's a safe estimate, and that's what we're looking for.
So now, conservatively, you have to charge $75/hr in order to maintain your life style, and that still assumes a perfect world. No illnesses, no financial issues, customers paying correctly and on time, etc.
That number gives you no breathing room, at all. No room for error, and very little room for growth. And, I would argue, that's not a luxurious lifestyle. Excepting the unemployed, no one in the United States should set out on their own to start a business to make $35,000 a year! It's bad math.
But here's the challenge. As a 26 year old, making $16/hr in 1999, the idea of charging $75/hr (let alone the $125/hr that I should have) was traumatizing. My god, I thought that was a lot of money, in comparison to what I was making. Sit down with a quick spreadsheet though, and the truth was vastly different.
It didn't take long to realize that it was an incredibly insignificant amount of money, and that I could not live on that, let alone create a viable business. In my experience with independent consultants, most of them start off under-bidding themselves and charging far too little. It can be very difficult to justify to yourself the rate you have to charge. So, sit down and objectively look at the numbers, so you can understand them and explain them to both yourself and your customers. Remember, it's always easier to lower your prices than to increase them.
And what about pricing as the business grows? That's a whole different animal for another time.
The first part of this post briefly delved into the financial part of hiring your first employee. Basically, is the math there to consider moving from independent consultant to small business owner with employees. My feeling on it was that the bottom line should forecast revenue increase with any early hire.
I would argue that issues like customer support, product development, etc. will help drive later hires, but the profitability should already be there and the finances of any hire must still make sense. However, employee number ten has far less of an impact from a percentage basis than does employee number one, and as a business owner, both the specific numbers ($40,000 salary) and the percentages are important to pay attention to. We sometimes get caught up on one or the other.
So, for that first employee, the math may be that as one person, you make $100,000.00, and 100% of the revenue (after expenses) goes to you. Adding that first employee at $40,000.00 (which costs you $60,000.00 really), needs to increase sales to $200,000.00 in my mind. That means that as the owner your percentage decreases to 70%, and honestly some people have a terrible time adjusting to that idea. Of course, you also make $140,000.00 now, so it's good math. Trust me when I say that 15% of $1,000,000.00 and ten employees will give you far more personal time and satisfaction than busting your ass for sixty to eighty hours a week for $100,000.00!
But the idea of the first employee really is incredibly difficult for some people. It was for me. Again, without having children of my own, I can only hypothesize, but I liken it to the first child a couple has. You read the books, you talk to people, you plan and plan and plan, and then the baby comes, and it's nothing like you expected or planned for. Perhaps your first employee isn't quite as disruptive, but the planning and fear and excitement and trepidation is all there. Which means you need to decide whether you are ready because here's a few examples of how it will change your life - both from a personal and business standpoint.
Do you communicate well? You will need to identify what you want that new person to do, and perhaps not do, and be able to explain it clearly and quickly.
Can you delegate? You haven't had to so far. Can you give up some responsibilities and duties? Micro managing one person is an easy trap to fall into. So is letting them run free. Neither is a good idea.
What will this person be responsible for? Like with planning for the baby, the plan will change Day 1, but do you at least have something in place for what you want this person to do and why. Are you giving up aspects of the business you don't like or are not your strengths? Are you planning to give up areas that are your strengths or passions in order to focus on another part of the business? Are you strategically planning how to best utilize this person?
Can you share? Delegating is one thing, but you may well need to share a lot of information that many business owners consider personal. How much are you billing? What are the business expenses? Even if you don't advertise your salary or profitability, the savvy employee will likely have some idea. Some people are incredibly uncomfortable with that idea.
Are you patient? When I hired my first employee, I had been training and consulting on Symantec Ghost for three years, and had spent several months working on development of the UIU. I understood it, but I had to have the patience to let my new employee catch up.
Can you handle the responsibility? I've said it before, but this was the scariest thing I've done because I would now be responsible for someone's livelihood. You should be nervous, but if it keeps you up a night with a bleeding ulcer, it's a bad decision! And if you're flippant about it with a "someone can always get another job" mentality, I think you would do an injustice to your employee.
Can you let someone else be responsible for you? That's essentially what employees do. How they interact with customers or develop your product will directly impact you in so many ways. If you are fiercely independent, an employee may be an incredibly difficult thing for you to accept.
Do you have the rest of your business in order to accommodate an employee? Have you talked to an accountant about expenses and taxes? What about benefits? Do you have a lawyer that you've discussed an employment contract with, if it's necessary? How will you handle payroll? I started using Paychex with my first hire so as to ensure his paycheck was always there for him regardless of whether I was in the office or traveling around the country.
This list can go on and on, and as the business grows, the list will change. At this stage in the game for Big Bang, adding an employee now brings little if any stress associated with that individual hire. However, Big Bang is nearing the point where I won't have as much of a direct connection with new employees as I once did, and that's my next horizon of fear and trepidation. Of course, it also means exciting opportunities and growth for the business as well as for my employees and that's hard to ignore.
What it comes down to though, is that hiring requires a lot of thought and reflection. Each person has brought something to the company that has made it better, and I am so very thankful that I took that step. But it's not a step to be taken lightly, nor is it a step everyone should take. Think long and hard about whether you are ready.
In my opinion, hiring your first employee is when a business actually becomes a business. As the owner, you are responsible for the livelihood of someone else, and that person is ultimately responsible for yours.
I have said many times that the scariest decision I ever made was my first hire. Getting engaged? Easier. Getting married? Easier. A million dollar loan for office buildings? Easier! Firing an employee? Incredibly difficult, but easier. If I had children I would liken it to finding out your wife is pregnant with your first child. It is exciting and terrifying at the same time. Employee number two is a cake walk, probably like child number two.
There are so many things to consider with that first employee, and I think it is worth walking through a few ideas.
When to hire:
Having quit my job with FedEx in 1999, I was working as an independent computer consultant. Most of my jobs were along the lines of creating Microsoft Access databases for customers. I also did a lot of training and consulting work, both with Microsoft products as well as Intuit's QuickBooks. A fair amount of work came from clients of my accountant as I helped them migrate from paper bookkeeping methods to electronic. Additionally, I handled some small network setups. Essentially, I worked as the IT department for small companies with five to twenty employees. Finally, in 2001, I added traveling to provide training and consulting for Symantec Ghost through Binary Research International.
The rates I charged my clients varied greatly, from as low as $60/hr to as high at $125/hr. For my traveling work, I generally charged $500/day plus travel expenses. And of course, like all independent consultants, if I wasn't working I wasn't making money. When you sell, you don't work, and when you work, you don't sell! Consequently, while $125/hr seems like great money, and it is, it does not translate to a $250,000.00 salary like it would if it were a job. So, my income varied dramatically from week-to-week and month-to-month.
I count myself incredibly fortunate to have had all that going on, and with gross sales of about $100,000.00 annually, it was time to hire someone. Here's what went into that decision, and it is all about math:
First, my new wife had a full time job which included our benefits. She wasn't making great money, but it was enough to live on and her opportunities were only going to grow. Not that we could support us and an employee on her salary, but it gave me a level of comfort to know there was a backup in place.
Next, business was growing. I had to spend less time "selling" because I was getting referrals and more work from my existing customers. Also, because I was providing training services for Binary Research, they were doing the selling for me. More billable hours for less selling time! If the graph is moving that way, you're going the right way.
Also, I was working more than I wanted to be. Weekends in a client's office and calls late at night. Traveling on Sundays. My life was being encroached upon. Should you be willing to bust ass and work hard? Yes. But you have to decide when too much is too much. I was reaching that point.
Finally, my customers were beginning to feel ignored. That can go on occasionally and they will understand, but it can't happen for long before you start to lose clients. If taking on a new client will negatively affect your relationships with your existing clients, or if you are turning away PROFITABLE work, then you are rapidly approaching the point of needing an employee.
You can afford to push your limits and client's limits for a while, and I encourage it in order to ensure the financial stability you need to hire. But really, the first hire should only be a math problem. Assuming you are charging the most you can in your market, you have some level of financial stability, and a reasonable forecast for growth, then you can do the following math problem:
If I make $100,000.00 annually and hire someone for $40,000.00, and don't increase sales, can I survive?
If I make $100,000.00 annually, and hire someone for $40,000.00, can I increase the amount of business I do by at least $60,000? (Figure salary plus 50% for true cost of an employee.)
If I make $100,000.00 annually, and hire someone for $40,000.00, can I increase the amount of business I do by at least $100,000?
If the answer to the first question is Yes, then you may really be considering a first hire, but without a plan for growth, or some major anticipated looming project, it's a bad idea. You are better off dropping a client or two to maintain the quality of your work. Don't hire!
If the answer to the second question is Yes, then you are actually in a position to hire, but to what benefit? Your salary and your new employee's are covered, but each employee, especially the first one, should represent an increase in BOTTOM line revenue. Paying someone $40,000.00 for a $40,000.00 project is bad math. I think this is one of the more damaging decisions people make because there are always expenses associated with employees that you don't foresee. And if sales dip, then you're back to question 1, and that's not a happy place to be.
If the answer to the third question is Yes, then you are ready to hire. In a small business, an employee should only be brought on if that hiring will increase the bottom line profit, and I think that amount should be at least equivalent to their annual salary, and preferably more.
If you can honestly do that math above - with whatever salary numbers are appropriate for you - then it's time to consider two more things. Are you personally ready for an employee, and who do you hire?
About Big Bang Blog
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|About Adam Murphy -
Adam is the President and Owner of Big Bang LLC and espouses a pretty progressive small business philosophy based primarily around hiring the right people and getting the hell out of their way.
|About Nate Bauer -
Nate is the Marketing Director for Big Bang LLC and pretty much spends his days tip-toeing on the pinnacle of how to most effectively implement strategy given the wide open cookie jar of small business marketing possibilities.
|About Kelley Burian - @kelleyburian
Kelley is the Sales Director for Big Bang LLC. Responsible for everything from GSA contracts, resellers and international customers, she has her hands full doing whatever she can to make sure our valued clients are thrilled with our fantastic products.