Sometimes doing more requires more hands on deck. Labor costs are a huge part of any small business’s budget. So we all look for ways to improve productivity and find efficiencies with the staff we have.
But, sometimes seeking more revenue and more profit means hiring more staff. You made a capital investment to turn that crumbling concrete next to your restaurant into a nice outdoor patio with more tables. Don’t blow the potential returns on that investment by overworking your current staff and expecting to maintain customer service levels.
The challenge is that often, a small business needs the extra staff before the revenue is coming in to cover the additional costs. That’s where a working capital business loan can help out.
A working capital loan is designed to cover costs you’d otherwise pay from any working capital your small business has on hand. The simplest accounting definition of working capital is your assets on hand, such as money in the bank and inventory, minus any liabilities, such as supplier invoices or loan payments. This difference is what you have available to pay your day-to-day working expenses, which include your payroll.
In fact, the only working capital you really have to cover payroll is the cash you have in the bank. Most employees aren’t going to accept materials or inventory instead of a paycheck. When a small business’s cash flow can’t support any more staff, it may be leaving money on the table. It’s a cruel catch-22 so many small businesses fall into.
A working capital loan can definitely provide the cash to hire and pay more staff, but there’s a challenge to doing it right. You want to make sure that the investment you’re making in taking a working capital loan to hire new staff is a genuine investment, not simply covering expenses.
Here are three ways to use the business loan wisely to hire more and better staff, and realize a great payoff from using a working capital loan to staff up:
- Create a top-notch onboarding program that improves all employee productivity and reduces employee churn.
- Ramp up in advance of seasonal hiring so there’s no drop-off in service or your reputation.
- Stay (or become) a competitive employer in high-skilled industries, like quality construction contractors or specially-trained medical office staff, or where employee pay models are shifting and unpredictable (I’m referring to you, restaurant industry).
Invest in a Formal Onboarding Program
Everyone working at a small business is so time-strapped, the welcoming and training of a new employee can be a bit ad hoc. A typical new hire process is to have the new employee read your employee manual and then shadow their more experienced counterpart.
A formal, fully developed onboarding process for new employees is a multi-step process with clear performance milestones and feedback loop. It takes time and effort to develop but is worth the effort. The Boston Consulting Group looked at 22 different HR practices and found that employee onboarding had the second highest impact on business success.
Consider how long it takes from a new hire at your business to become truly productive. HR experts place average ramp up times to last anywhere from a few months to a couple of years. You already know how long it currently takes at your business. And how many employees leave before proficiency kicks in, or shortly thereafter?
An effective onboarding process formalizes the training, mentoring, and fostering of your business culture on new employees. It also engages current employees in the success of your new hires. The result is new employees who are more productive, more quickly; and new and veteran employees sharing a sense of personal connection to your small business. Two conditions which also translate into longer employee retention and avoiding all the direct and indirect costs of high employee churn.
Look at the dynamics of a medical practice as an example. The Medical Management Group Association (MGMA) is clear that practice profitability is directly linked to having the right number of support staff for each full-time physician. But as their guidebook on practice financial success highlights – it isn’t just having more staff, “but having the right staff doing the right things.” The toll and costs of employee churn and under productive employees is high. Having an onboarding program creates staff stability and improves the quality of your staff.
If it’s time to staff up, use this as an opportunity to invest in recruitment and onboarding processes that will provide a return to your business well past the hire dates of this initial group of new employees. One of the advantages of a working capital loan is that you typically don’t need to specify exactly what you’ll spend it on. “Working capital expenses” is usually sufficient. So if you’re taking a working capital loan as the bridge to hiring more staff, use some of it to implement the onboarding program that matures your business and its staff.
Confidently Ramp Up Seasonal Hiring
Seasonal businesses are prime examples of when a small business owner needs to pay for staff before the corresponding revenue comes in. In an ideal world, you’ve been able to manage your cash flow and volume of working capital throughout the year. This means holding on to enough cash generated during your high season that first carries you through the low period, and also leaves you able to stock back up in preparation for the return of the busy season.
That’s a tall order. Common seasonal businesses, like restaurants, hotels, and construction contractors are prey to any number of reasons why stored capital has to get spent instead of being available to staff up in time to meet busy season demands.
For example, the construction industry is notorious for its slow account receivables cycle. A recent market trends report showed that on average, businesses suffer through 17.68% of A/R overdue, while the construction industry enjoys a 25.3% A/R overdue rate. And that’s for overdue A/R.
Common construction payment terms require sub-contractors to put out for materials and labor well before payment is due. And the sub-contractor small business owner knows he isn’t going to get paid until the GC is paid. And who heard of a construction project that doesn’t get delayed at some point by something – anything?!
A working capital loan to cover pre-season hiring helps smooth out the rough patches until high season revenue actually starts coming in.
If you’re a restaurant, you don’t want to wait until you need the staff to hire up and train. Even if you have the great onboarding program, it takes time for new staff to meet your customer service expectations. Your reputation needs to hold, or improve, from high season to high season. If customers can’t rely on your quality from the kitchen to service, all of sudden your busy season isn’t so busy. That means you need cash to hire and train staff before you need them. If you’re not hiring early, your competitors are. Which means you’re left with second-best.
This is why you also want to be able to hire more staff than necessary to account for the inevitable drop off. Some new hires just won’t cut it. Others will flake out and decide to spend the season chasing the perfect wave. Who knows. Whatever the reason, you don’t want to get caught short-handed during the high period because you didn’t hire enough people early on.
Become a More Attractive Employer to Potential Employees
Another way to wisely invest your working capital loan when hiring staff is simply using it to increase employee compensation so you can attract the best employees. Maybe your available working capital can cover another hire or two if you keep costs low. You’ll get your new hires, but will they be hires who can provide a return to your business?
In some cases – you may not even be able to hire what you need without improving the compensation package you planned for. According to the Associated General Contractors of America (AGC) 2016 Construction Industry Hiring and Business Outlook, 71% of construction firms plan to add new hires in 2016, and half of those surveyed are worried about shortages in skilled workers to fill this need.
The result is predictable. Nearly half have said they’re raising base pay, while 30% said they’re increasing bonus and incentive pay. 23% are planning to up their contributions to employee benefits.
If your small business is operating in an industry facing a shortage of high-skilled workers, increasing compensation may be necessary to just keep up. Nursing schools are churning out nurses at all different certification levels as fast as they can. Yet the nursing shortage continues. Is your medical practice able to offer a compensation package that attracts the best nurses with the right qualifications for your practice’s needs?
Other types of market forces can also lead to hiring problems. Right now, the food service industry is filled with various market and regulatory forces chipping away at the traditional restaurant model – low hourly wage plus tips.
Some restaurants have tried a “no tip” model, only to see their best servers leave for other restaurants. Other restaurants are experimenting with getting rid of the back of the house/ front of the house split, which has its own impact on compensation schemes.
Then of course, there are the regulatory pressures. New federal overtime regulations put pressures on scheduling, hiring, and compensation, and are putting extra pressures on restaurant owners how to treat and pay their managers. States and localities follow with their own changing laws and regulations, such as mandating higher minimum wages and uniform allowances.
The restaurant industry has gone from having one static, standardized pay model to having a lot of variety and unpredictability. Where new laws or regulations increase labor costs, you might need a working capital loan just to get into compliance on time, but before you’ve been able to make operational changes to cover the increased costs.
In other cases, a restaurant trying out a new compensation model that offers better pay or more pay stability may lure away your best staff. On the other hand, if you get creative with your own compensation model, it may end up leaving your staff with less pay. This has been a common result of restaurants that have moved to a high hourly/no-tip model. In these cases, they endure a lot of employee churn.
Just as with the skilled nurses and contractors, experienced restaurant staff has a lot of options. If your small business can’t offer an attractive compensation package, you’ll lose out in staff quality.
You’re Only as Good as Your People
Customer experience is a major differentiator for any business, whether local bakery or international brand. The key to any quality customer experience is your people. It could be based on the skills they need to produce quality work. Or it could just be the attitude and diplomacy they can bring as the frontline face of your business.
You wouldn’t skimp on quality materials. Don’t do the same with your staff. Don’t let your business fall behind because the lack of working capital is preventing you from hiring the staff you need. Getting a working capital loan to help your small business attract, train, and hold on to the best employees strengthens your business.
With the new staff, your business is better positioned to take advantage of the revenue-enhancing opportunities in front of you. Whether you’re expanding your business’s physical space of service bandwidth, make sure you’re fully staffed with the right people to take advantage of the moment.