hiring a manager could sink your business

Everyone's Mike Andes. And today I'm going to be talking about how you can keep out cultural cancers from your business as well as keep your profits much higher. And this was kind of born out of one of our franchisees, has really grown very, very fast. Faster than most of our franchisees ever would. Within a year was doing six figures in monthly revenue. And that causes a lot of strain in the business. As I've talked about before, growth sucks cash and it also grow sucks. It creates a lot of chaos. And so a lot of times when someone's experiencing hyper growth, as in the cases with, with this Augusta lawn care franchisee, they immediately default to wanting to have people help them. And that's the right thing to do. But sometimes adding in non revenue producing employees or overhead or management tiers to a business can be very detrimental. So using that as kind of my kickstart, I want to talk today about adding in layers of management as well as hierarchy inside of a business and how it can really hurt your culture but also really, really erode your margins. And I'm going to talk today about the two different wildernesses of your small business. When I talk about wildernesses, I've talked a lot about kind of between that 300,000 and 500,000 in annual revenue. How a lot of times that's like a financial wilderness that you will wonder through because you don't make a whole lot more money. Money in profits at 300,000 versus 500,000 usually because after 300,000, the owner, you are required to actually be a non revenue producing employee. You start focusing on sales, hiring, training, and because of that you get out of the field, you start working on the business. But that means you're not producing revenue. Especially if you're a home improvement business where you actually are giving an hourly rate to a custom and you are no longer on the truck, you are no longer producing revenue, you're actually a cost to the business. So I've always talked about wilderness number one being that 300,000 to $500,000 level. But today I'm going to talk about the next stage of business as you continue to grow past seven figures in annual revenue. Another wilderness that I see. And I want to talk about why that is. And it really comes down to hierarchy. So let me kind of back up just a little bit and talk about how important, in my opinion, this is just my opinion, how important it is to destroy hierarchy in a business. I really believe that it's to have access to management. Employees feel like they can either somehow Reach out to management or they can. They feel like they can talk to them if there's a problem. Obviously there's gonna be some employees that don't do that, and they feel like they either might lose their job if they do, or they're just not comfortable talking to their boss or someone that's an owner or something like that. And that's understandable. But trying to make it accessible, I think is important. And that's why for myself, like, I don't have my own office. I don't have a. I don't even have my own desk. It's like, look, I'm just gonna take an available desk in the office. I'm gonna sit down, I'm gonna get my. My day started. And I like to be actually the front lines with the employees as much as possible in terms of the office or even if out in the field. And I like to also be as. Try to be as relatable as possible so they feel like they can access me. For example, when I go to the office at Augusta Lawn Care, we have command center and on Fridays we wear yellow shoes, right? And so I have these yellow Converses that I wear just to be part of the culture. And I didn't really come up with that, they did. And everyone really enjoys it. Some people wear Crocs and everything. It's obviously yellow is the color of Augusta Lawn Care. And so on Fridays, everyone wears yellow shoes. Now, if I showed up to the law locations that have field employees, actually workers out in the field with my Converses on that were yellow and my, you know, button down shirt and nice khaki pants with a nice belt on and a nice watch, I probably would not be taken very well. And it would push me away from being more accessible to them because I don't feel as relatable. So when I show up to a team meeting in the mornings at any of the locations that actually have workers going on the field and mowing grass, trimming bushes, I almost always, I've missed it a couple of times because my pants weren't ready or something like that. But almost always I try to be my boots and be my work pants and I try not to be my office clothes with nice khakis and a belt and a watch and nice shoes. I try not to be that way because I don't want to make it look like there's delineation between management and the frontline staff. And I feel like it's important to do that because I see some businesses where managers start to Wear different uniforms, they start, have a different start time, they park in different spots, they have different perks, they have different compensation packages. And in my opinion, it's like, look, we're all on the same team and the more we can make all of those things I just mentioned aligned and equal to everyone, the better. And so some people would say this is like, you know, foo foo kind of management, like new age millennial type. Treat everyone equally and make sure the managers are accessible and relatable to the employees. But I actually believe it's better for profits. I'm going to explain that today why breaking down that hierarchy of management that is so prevalent in massive businesses is actually good for your profits. Now as a company grows much, much larger, I'm talking multiple millions in dollars in revenue. You have to have start. Hierarchy has to start forming. Because it's just impossible to just have a flat line, one person at the top with a whole bunch of employees under. That's impossible as the business becomes very large. But I find too often small businesses under a million dollars or even up to $2 million in revenue jumping to a very hierarchical structure far too early in their business and it's killing their margins. And I want to talk about that today. And I really do believe that the more you can reduce fractions between office and management versus frontline production employees, the better. And I require my managers to feel like the frontline staff and make sure they've been through the front period so they don't just like, oh, like it's pouring down rain, guys, why aren't you working harder? You guys are behind. Like they actually at least have an understanding and a heart for the fact it's pouring down rain and you're sending guys out to mow grass. Like, it's extremely demoralizing. And it's actually one of the hardest things for me is when I go to the local shops and I know it's just horrible weather and it's gonna be a miserable day and I have to see them go out and work. I hate it because I remember those days. I know exactly what it feels like and I need all of my managers to feel the same way. Although we know the work has to get done, although we know if to push and encourage the guys, we need to feel the way that they're feeling and at least understand what they're going through. And so I feel like the more you can, the less you silo management and kind of white collar office type jobs and ownership and things like that and get out, get them out of ivory tower and put them together with the frontline staff. I think that's very important. It's, you know, I look at leaders like Elon Musk who worked on the floor of Tesla at their hardest moments for the, for a couple of years working on the floor with the frontline staff and trust me, the culture of that company was improved because they saw, okay, it doesn't matter where someone is at on the totem pole, whether they're owner, whether a CEO, they're willing to roll up their sleeves and get dirty. They're willing to roll up their sleeves and work with us and be on the same team. And it's not like us versus them. That us versus them thing will absolutely crush your business. It'll crush the culture, it'll crush employees and ultimately lead to lower profits. So really what I see though is issues. I have an issue with small businesses that add layers of hierarchy. Get general managers and office managers and crew leaders and foremen and all these different layers of management when their business is really not ready for it and financially can't take on all that overhead. And ultimately that's what hierarchy does, is it adds overhead. And that complexity, that structural complexity of the organization is required as the company grows. But it comes at a cost. And if it's done too soon, the cost of adding hierarchy and structure and non revenue producing employees and that overhead can actually suck out all the profits in the business. And I want to show you that today. So I want to go ahead and draw actually how I kind of think about efficiency and profitability. Profitability and I'm not very talking and writing. One day I'll improve at that profitability and efficiency of an employee. I'm going to as all good things. Put this on a chart. Okay, so this is kind of how I think of when it comes to employees and efficiency. This would be like 0 employees and they got like 1, 2, 3, 4. I'm just going to go up to like 7, 8. Let's do like 9, 10, 11. Let's do that. 1212 frontline staff, 12 employees. Now let's track the efficiency of these employees as you add new employees. So up here this would be like over here is efficiency. Or we could say profitability. Same thing. Okay. Efficiency, profitability, number of employees. So when you have zero employees and you're by yourself, you're going to be ultra efficient. That's the top left hand corner here. Right there you're going to be ultra, ultra efficient. Highest on the efficiency level, highest profitability. When you're out in the field working. Now, as you start getting employees, they're going to be not super inefficient, you know, your first employee, but not efficient as you, not as profitable as you. No one cares for the business like you do. Okay? And then as you get more employees, typically this is the kind of trajectory that I see and that is your efficiency drops with the number of employees that you hire. Now this is not to scale. I'm not saying that your fifth employee is one fifth as efficient as you. I'm just trying to make a point here. Your efficiency usually drops down to kind of four, five, six employees. Now if you don't have a super hierarchical system and you start to scale past this, this is usually right around the time when you're hitting past that 500,000 in annual revenue point. And that's first wilderness. I talk about getting through that point. That's usually right around this period here at the bottom, the trough. And that's why I say you don't make much more money at 500 than you do at 300, because this is probably where you'd be at in terms of 300,000. Your employees are much more efficient because you have eyeballs on them all day long. You know everything they're doing throughout the day, you can keep track of them a lot easier, et cetera. Now if you don't have a lot of hierarchy and you have more employees out in the field and you don't have a whole bunch of management and all the rest of it, you actually get economies of scale. And that's where over time, as you hire more employees, the efficiency and the profitability of each marginal employ will actually improve because you have economies of scale. If you get an office at this stage of 500,000 in revenue, you don't need to get like a bigger office in order to get more employees. Typically it doesn't like scale. Your cost, your expenses, your sunk fixed costs don't go up a whole lot more when you have five employees versus 12 employees. So that's what can happen, economies of scale as you grow the business. And this could say, you could say this is say like a million in revenue, just for example. Okay. As the business has grown. Now this is the thing though. If you add layers of management, if you add and foreman and an office manager and office assistant and you have all these non revenue producing employees, this is what I find a lot of small businesses fall into. And either they fall flat plateau or even actually decline in profitability and inefficiency because of the hierarchy that's created by adding all this non revenue producing employees to the payroll. I want to look at an example of a 12 employee business. Okay, so just follow me for a second. We're going to run some numbers and use that chart to kind of exemplify something. So we're going to assume that this business has a $660 per hour rate they're charging the customer. So let's call this the labor rate. That's $60 they are charging the customer. And again, this is a 12 employee business. This is kind of stage two. Maybe you're not there right now, but this is what's going to happen if you start to add too many layers. 60 hours, $60 per hour is a labor rate. We're going to assume a 75% efficiency. So that's pretty common in terms of if you have six budget hours in the day, that's going to take them eight hours to do the work, about 75% efficiency because they are loading up their truck, they're up, they're getting back and unloading equipment, et cetera. So assuming a 75% efficiency rate, that's going to mean that we have a $45 effective, $45 per hour effective rate. And I just came up with that number by doing 75% multiplied by $60 per hour means they're earning the business per clocked hour, $45 per hour. Now if we assume that we have a 10% profit margin on this business, so 10% profit, that would then mean that the business is making $4.5 or $4.50 per hour in profit on each hour of labor. All right, so again, let me run these numbers. We charge the customer $60 per hour. We have a 75% efficiency rate because there's waste just fueling up and all the rest of it. So 45 hour, $45 per hour is the effective amount of money that an employee earns for the business. And if you assume that 10% of that hits the bottom line, 10% profit, that would mean that 4.5 or $4.50 per hour is profit for the employee. Now let's go ahead and keep running the math here. Let's assume that there's a full time employee, so 2000 hours per year. And we're going to multiply that by that 4.5 is going to equal out exactly $9,000, $9,000 in profit per year. Okay. And so really what you're saying is every single employee, as long as they work full time, is going to earn the best $9,000 in profit. In profit, like bottom line profit for the business. So now if we take that 9,000, that's how much we are going to in profit and multiply the 12 employees that we have, that comes out to a total of $108,000 in profit for this 12 person business. Okay? So I hope you follow with me so far on the math, but let's go ahead and move forward and see. Okay, at this size business, maybe the business is doing, you know, 1.1 million or so in revenue because $108,000 in profit. Sorry, yeah, 108k profit would assume approximately 1.1 million in revenue. Okay, alright. So at this point now you're like, okay, I need a manager. I need someone to be able to actually manage this business for me. It's too much on my shoulders and it just, I need help or I don't want to work as long in the business. Okay, great. Well let's just assume that the salary of that manager is just reasonably, you know, they're handling ops, et cetera. Let's just say $54,000 for the sake of simple math. Their salary for the year is going to be $54,000. Well now all of a sudden you're 108k in profit. Just went to $54,000 because you take 108 minus 54 equals $54,000. Which means our profit got cut in half because we hired this manager. And this is what I feel is so important is like, well, if you add a manager, the thing is they're not bringing any more revenue to the business. What brings revenue to the business is production is more employees. Now the only reason I would hire this manager if it means either a, the business is going to fall apart because I am physically and mentally not able to keep running the operations of the business or two, by hiring this person, it's going to unlock a whole lot more growth for the business. And that second reason is why a lot of people will say they need a manager. And so what they'll say is like, well, I can afford the $50,000 in revenue or in profit are going to afford their payroll at $54,000 because I'm going to be able to grow the business so much more. But this is what's really important. You can actually determine how much you need to grow top line revenue in order to just pay for their salary. Because for examp, their salary is going to be 40,000. I know I'm changing up the number, but $40,000 is going to be the salary of someone that you're going to use for managing your business. Well, if you have a 10% profit margin in your business, what that means is you are going to need to increase revenue. Revenue is going to need to go up by $400,000 in order to absorb that overhead cost. Because out of that $400,000, if you're 10% profitable, that's going to lead with $40,000 to cover their salary, which means you're going to have to grow your revenues by 400,000 do and you're just going to get the same amount of profit. And by the way, growing your revenue by $400,000 is going to lead to a whole lot more capital expenditures that to buy trucks and equipment and hire more people. And that's going to lead to even more expenses beyond just the profitability we're assuming is 10% on that additional 400,000 in revenue. So this is something to keep in mind. If you're hiring non revenue producing employees, ask yourself, what is my profit margin? Multiply that by what their salary is going to be and that's going to tell you how much new revenue you need to bring to the business to cover their salary. So ultimately, if we go back to the example that we were just talking about, if someone needed to have $54,000 in their salary for a manager, that means we're gonna have to have 540k in extra revenue to cover their expenses, cover their salary. And so if I was doing $1.1 million in revenue and netting out, you know, 108k in profit, if I want to get 108k profit, I am going to literally need to, to, you know, 1.1 million plus 540,000. I'm going to grow the business to literally $1.64 million if I'm going to achieve that same amount of profitability. So you go to Astral, does add new manager, that new hierarchical level, the new office person, that new foreman, that new non revenue producing employee, does it actually contribute to the bottom line or is it just adding steps of hierarchy and rank inside the business? And again, I'm not opposed to this. You need it as you grow your business and you will need it. You can't physically do everything yourself. You have to delegate. I understand that. But from a profitability standpoint, this is why it's so difficult at certain stages of the business. We've talked about Wilderness number one, so let's talk about that real quick. Wilderness number one is. Wilderness number one is like we talked about before is going to be at 300,000 to $500,000 in annual revenue. And that's because again, this is the first time you have a non revenue producing employee and that becomes you the owner. You have to get out of the field and actually start doing estimates, hiring people, training, etc. But wilderness number two, kind of the 2.0 of this exercise is the fact that you are, I typically see, and again, this is a little more rounded number, but somewhere between 1 to 2 million there is a gap, a big chunk of revenue where you don't see any extra profits. It's not saying that you don't make money in this business, but what I'm saying is that between 1 and 2 million, a lot of times you won't see any increased in profits because you have to hire management. You cannot manage a business that does 1.8, $1.7 million in revenue and have no help, like no management help. Because usually you're gonna have 15, 20 employees. And you have 15, 20 employees and have one manager's top is like you're gonna burn out. If you're the person managing them all, you're gonna need an office person. You're going to need some help with the operational side of things. So this is where again I see a lot of times people struggle. And this is why a lot of people will either a, they'll burn out like 250 to $400,000 in revenue, that's wilderness number one. Or they'll grow past a million dollars in revenue and they'll realize that they can't afford to hire managers. So what do they do? They take everything on themselves and they burn out. Or they hire a manager and they wonder why there's no more profit in the business. It's because what we just talked about and their profit margin multiplied by the salary of that non revenue producing employee makes a massive amount of revenue is required just to make up for their salary. And so you might be saying, well like what am I supposed to do? How am I supposed to like make sure I do this correctly? All I want you to do is make your business profitable enough so that as you scale and as you grow, you can afford those managers and you can afford that hierarchical structure as it is required. But I want you to see an example here because again, if a business is at $1.5 million in revenue, okay, so that's going to be the revenue. Again, this is higher level revenue. That is going to be if we have a $200,000 profit 200k profit, that is going to assume a 13.3 profit margin. Alright? Now the exact same business to the exact same amount of revenue here we got 100 or, sorry, $1 million in revenue, that's going to be our revenue. But now this business does 20% profit and guess what? They make the same $200,000 in profit at the end of the year. The difference here, what's the difference is having an extra manager. And so this is what I see time and time again. It's someone at million dollars in revenue. And then like I can keep growing, everything's going great, I'm going to grow my business. And they do. And what happens? They get to 1.5 million, they get to this point, they're like, my goodness, I don't have any more profit. And what happened is the fact that they had to go hire a manager, they had to go get somebody to answer the phones, answer the emails. And because that fixed cost of salary is such a massive drag. And they multiply. If you just do the math, multiply that out by your profit margin and you'll determine how much revenue you have to increase just to make up for their wages. So this is not to discourage you, this is just to realize that if you're in these wildernesses, if you're in that 300 to $500,000 range, which I know most of you are, or if you're gunning for this 1 million to 2 million dollar range, realize that these are periods of time where you can see that profit stagnate. And it's not because you're wrong or you're different or weird, or you're doing something wrong. It's simply a matter of economics when it comes to what is required for hierarchy in the business. And you will need, absolutely need management. You will absolutely need an EST and office management at $1.52 million in revenue. But that will eat into your profits. And that's what tempts a lot of people, is to go back to under a million. It's like, man, I'll just have eight, nine employees all be out doing estimates and hiring people. And I'll just focus on that and that's fine. Or you scale past that $2 million in marker and that's usually when now those managers can still hire. You can get 30 employees with a few managers in place. So this is something to think about again. I make these videos so you can educate yourself and if you're in these wildernesses, understand why you're feeling the way you do. And why, you know, cash is probably really tight right now. Why it's really difficult to be able to compensate for the fact that you made more profit two years ago when you made 30% less revenue. And so it's just something to keep in mind. It's the rules of hierarchy. And as you add those layers, it's not only a cultural strain on the business, it's also a profitability strain as you go through these wildernesses in the company. I hope that was helpful. Check this video out here of how you can also grow your business to a million dollars. Is a longer form webinar walking through the stages required to build a million dollar business. But the stages of growth along the way. Stages of growth going from zero all the way to million plus dollar business. Explaining more that chart that we talked about in this video.