When Small Business Owners Ask "When Can I Hire?" - How to Know If You Can Afford Your Next Hire

I recently had an enlightening conversation with Rhamy Alejeal on the People Processes podcast, and one question kept coming up: "When can I hire?"

It's the question that keeps business owners up at night. The one that makes them second-guess every financial decision. And honestly? It's the question I get asked more than any other.

Here's what I told Rhamy and what I tell every business owner who's wrestling with this decision.

The Real Cost of Hiring Wrong

Most small businesses hire when they must: when they're drowning in work and desperately need help. They hire who they can find and figure it out as they go.

There's nothing inherently wrong with this approach, but it's expensive. Really expensive.

Turnover kills companies. When you underpay or can't provide what the market demands, you might think you're saving money on labor costs. But the reality? The cost of recruiting, onboarding, and training new employees will eat up any savings. Often, it costs even more.

Big companies don't offer comprehensive benefits packages because they're feeling generous. They do it because it's cheaper than constant turnover.

The 35% Rule That Changes Everything

Here's where most business owners get it wrong.

If your business generates over a million dollars in real revenue (that's your top-line revenue minus true cost of goods sold), your operating expenses should only be 65% of that number. Period.

That means 35% should be going into your pocket as the business owner. That covers your salary, your taxes, and your reward for taking all those risks and sleepless nights.

But here's the kicker. If you're just starting out and only generating $100,000 in real revenue, that percentage flips. You need 70% going to you, with only 30% for operating expenses. Why? Because you're doing everything: answering phones, posting on social media, emptying trash cans, building websites.

The Investment Approach to Hiring

So when can you actually hire? When you can treat it like the investment it is.

Here's my rule: sock away two to three months of that person's salary (including the full labor burden; remember, it's not just their hourly wage) before you make the hire.

This isn't just about having a financial cushion. It's about changing your mindset. When you have to physically move money from your "owner" account to cover a new hire's salary, something powerful happens. You suddenly become very clear about whether that person is truly adding value.

The Two-Pocket System

This brings me to one of my favorite behavioral tricks: the two-pocket approach.

Set up separate bank accounts. One for operating expenses (including payroll), and one labeled "owner." When you need to hire someone but don't have the operating expense budget, you have to withdraw from your owner's account.

Suddenly, that $4,000 monthly salary feels different when it's coming out of money that could have been your family's summer vacation, the new HVAC system you've been putting off, or finally replacing that pickup truck that's been making weird noises since last winter.

It's not that you can't or shouldn't make that investment. It's that you should make it with full awareness of what you're choosing.

Your Values Drive the Percentages

Your values ultimately determine where your money goes within that 65% operating expense bucket.

One of my clients runs a foundation repair company in Texas. Technically, he doesn't need to offer a 401k to attract unskilled labor. But his values drive him to teach his largely Hispanic workforce about retirement planning because he wants to change their lives. When it's raining and there's no work, he brings them into the shop for paid training instead of sending them home.

The percentages within your operating expenses will reflect what matters most to you and your business model. But the 65% ceiling is your guardrail against financial chaos.

The Bottom Line

When small business owners ask me, "When can I hire?" I don't give them a revenue target or a magic formula. I give them a framework for making the decision with confidence.

Build your reserves. Understand your true labor costs. Create financial guardrails that reflect your values. And remember, you're not building this business to work yourself to death. You're building it to create the life and security you want.

Ready to apply this framework to your specific situation? Our Fractional CFO team specializes in helping business owners make confident hiring decisions based on solid financial foundations. We'll walk through your numbers together and create a hiring strategy that aligns with your goals. No pressure. Just clarity.

You can listen to the full conversation on the People Processes podcast for even more insights on building a financially healthy business.