When Your Business Starts Taking Off, You Should Hire Staff. But How Do You Know You Can Afford It?
Many hands make light work. Or so the old chestnut goes. But hiring those hands costs money—something that’s not always easy to come by in the business world. That’s the source of the dilemma in this month’s case. Ctar corp., a small firm, has more work than its founders can handle. Problem is, they don’t yet have enough business to cover the cost of taking on staff. Should they hire anyway in hopes that business will increase? Or should they grow first? There’s no easy answer.
Tina Gokstorp and Stephanie McLarty needed help. That much was clear. Business was growing quickly at their four-year-old company—CTAR Corp., an asset-recovery service that enabled companies to resell, donate and recycle their surplus equipment —and the two founders were being run off their feet. Their work weeks had ballooned to 75 hours apiece, much of that time spent moving equipment from customers’ locations to third-party warehouses.
Between that and finding buyers for the equipment, they faced a growing shortage of time to pursue new clients—a development that was starting to put severe restrictions on their ability to build the company. Clearly, they needed to start hiring employees so that they could delegate their workloads. But that wouldn’t be an easy step to take.
Although CTAR was a growing company, it was still small. Hiring at this stage would eat into its cash resources. Gokstorp and McLarty would even have to cut their own salaries to help cover costs, and their salaries were already below market rates. True, taking on staff would give them time to focus on generating new business. But there was no guarantee when that business would materialize. If it took too long, the wait would be damaging to CTAR.
Gokstorp and McLarty, friends who had both worked at a large telecommunications firm in southwestern Ontario before starting their business, came up with
the idea for CTAR when Gokstorp was asked by her manager to dispose of some obsolete equipment. She started learning about the secondary market for used equipment and became intrigued. She brought in McLarty to help her with the project, who found it equally fascinating.
They launched CTAR in 2006 and, over the next two years, built up an impressive client list. Not only did they help clients manage the whole process of recycling obsolete equipment, they also provided environmental reports on the amount of material recycled and reused. Gokstorp and McLarty kept the operation lean, outsourcing many of the transportation and storage services to a third party, then handling the balance of the operations between the two of them.
But as CTAR grew, Gokstorp and McLarty noticed their reaction times to client inquiries were slowing and their ability to manage the volumes was becoming more of a challenge. By the end of 2009, it was clear they had reached a stage where they would have to start hiring. McLarty could see that an additional salesperson could increase the resale potential of equipment and be useful in helping CTAR manage more customer interactions. New markets outside of Canada could also be explored. But hiring a salesperson would mean that a salary would have to be paid—probably in the neighbourhood of $60,000 —and both owners wanted to preserve their equity in the company. They would also have to find time to train their new hire, which would distract them from work.
For these reasons, putting off the decision to hire for six months seemed like a prudent measure. If they waited, Gokstorp and
McLarty could focus their efforts on growing the business, which would offset the initial cost of hiring. They would also have time to approach potential investors for funding to support the hire and to determine if their business was truly scaleable.
All of these were valid considerations, but Gokstorp and McLarty still faced the fact that CTAR’s operations were consuming the lion’s share of their waking hours. If they waited to make their hire, there were no guarantees they’d be any further ahead than they were now. For Gokstorp and McLarty, making a first hire was turning into one of the most challenging decisions they’d faced.
THE EXPERT VIEW
Don Cameron, Vice-president, WasteLESS Environmental Services Inc.
CTAR’s founders are right to be concerned about hiring as they deal with the next phase of their growth: In business-to-business services the hiring decisions are critical. The direct expense is one issue, but if an employee fails to represent CTAR well in the marketplace, the brand could be damaged and CTAR’s ability to grow impaired.
CTAR needs to define the role of the new hire. Sales are critical at this stage and that role may best be left to one of the founders. In any case, many of their large clients and prospects will want to deal with an owner/decision-maker. A new hire working in operations or customer service could relieve some of the work pressure. They would also come on board at a lower salary than a sales manager, which would reduce the financial impact.
As Gokstorp and McLarty think about CTAR’s scaleability, they need to address their launch process for new clients. Signing contracts now, but delaying or staging actual client launch, will give time for the hiring and training process, not only now but also as the company expands its geographic reach. As long as any delay in launch is addressed early in the sales process, many prospective clients will agree to a staged launch of services.
The training issues can be addressed in part by hiring from the industry or from related industries. With the recession, there is a great pool of talented people available, many of whom would enjoy the opportunity to work with a start-up. Some people will accept a lower wage to work for a smaller firm, especially if there is flexibility in hours and schedules.
Finally, CTAR needs to be opportunistic in hiring. If they identify a great candidate who they feel will strongly fit the company well, then it could make sense to take the risk of hiring now, before the business is fully on board to support the position. Just as it would be damaging to hire the wrong person, hiring the right person can be a catalyst for growth.
CTAR is entering a great business space at a time when awareness about the environment has never been higher. Sustainability issues survived the cuts of the recession intact. Companies that are offering real solutions to environmental problems can succeed.
Dan Crook, Chief Executive Officer, Emperex Corporation
CTAR must look at the underlying reasons and causes for expected continued growth and determine if it is realistic to expect same to continue. A pragmatic and realistic sales forecast is crucial in such decisions and many small-business people are consistently—and unjustifiably—optimistic when forecasting potential sales. I would caution CTAR against factoring international expansion as a justification in hiring a new salesperson. The key at this point is to focus on whether or not the potential business in the current territory justifies a new hire.
I would question CTAR’s assumption that it would be able to find an investor to fund the hire. After three years in business, the two founders are not able to draw market salary. Venture capitalists will not touch a firm like CTAR. More traditional sources of investment would likewise be uninterested. To this end, CTAR will have to fund a hire itself unless friends or relatives are willing to advance funds.
Given the employment situation in March 2009, CTAR could consider hiring a part-time employee with the goal of growing the position into a full-time one once business justified it.
Murray Bryant was my professor for Managerial Accounting and Control in my Ivey EMBA course. He was adamant that “cash is king!” I agree. It appears that CTAR is strapped for cash. It needs to do a cash-flow analysis that takes into account:
- any lost revenue due to the founders having to interrupt sales efforts in order to train the new hire,
- the ramp-up time required for the new hire to start bringing in sales,
- the impact of failing to meet sales forecasts,
- the expense of terminating an employee in Ontario and,
- the impact on cash flow.
If it is determined that a shortfall in forecasted revenues
after hiring a new employee would spell the end of CTAR, I would strongly advise against hiring at this time.
THE OUTCOME
Gokstorp And McLarty put off their hiring decision and looked at their options more creatively, particularly the idea of using government-funded training programs to test their theory at a subsidized cost. In 2010, they hired an intern originally from Latin America with telecommunications experience via the Enhanced Language Training program, which provides job-specific, advanced-level English training to new Canadians. With an extra pair of hands on board, 2010 is shaping up to be a great year for CTAR.
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This case study was prepared by Financial Post Magazine and the Pierre L. Morrissette Institute for Entrepreneurship at the Richard Ivey School of Business (University of Western Ontario). The case method is a key learning tool in the cross-enterprise leadership approach used at Ivey. The views represented here are solely those of the case authors. Some details may have been changed to protect privacy.
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