Eric Siu discusses when a small service business should hire its first employee. The key metric: aim for 50-60% gross profit margins. If you charge a client $2,000 but it costs $1,000 to deliver, that $1,000 cushion is what lets you afford payroll without burning cash.
At what point would Johnny be thinking about hiring?
As soon as he can afford it. So if his burn's really low, let's say he's making $10,000 a month and his burn's like $2,000 a month, he's got $8,000 to play with. You have some margin of safety there, right? The thing you should be considering with most service businesses is you want to have a gross profit margin of at least 50%, if not a little higher, maybe 60% or so.
Meaning that I charge a client, let's say $2K, but it only costs me $1K to deliver the service. So I'm making $1K gross profit and then there's taxes and all that kind of crap. But that's a reasonable amount for an agency.
