The valley of death: how many employees should you have?

I went to a seminar on Wednesday organised by Barclays. Our bank manager (who's brilliant - if you want a good local business manager in London, drop me a line) persuaded me to go along. I went for the networking, expecting the seminar itself to be boring bank stuff with a bit of Barclays-plugging thrown in. I was pleasantly surprised.

It was called "Let's talk more profit" and was given by Robert Craven. I hadn't previously come across his work, but judging by the comments of other people there, he's pretty well-known as a speaker on marketing and profit. There were some really good lessons in the seminar and some advice that I hadn't come across before. It was such a good session that I ended up buying two of his books, Bright Marketing and Kick-Start your Business.

The one piece of advice that has stuck with me and been bugging me ever since is a little chart he drew of what he called the 'valley of death'. He said that, as a skilled sole-trader practitioner, you could (depending on your industry, of course) perhaps make £100,000 / year. As soon as you start employing a person or two, your profit tends to decline (with rising overheads, the distraction factor and the time taken for an employee to become fully productive for you). He drew a chart that looked a little bit like this:

valley of death profitability chart

He said that it isn't until somewhere over on the right that you tend to get back up to decent profitability (perhaps making £100k profit on turnover of £0.5-1 million). The number of employees where this typically happens varies depending on your industry, but is typically in the 5-10 range. His advice was that this is the absolutely critical point where most small businesses fail (once they have got past the initial hurdle of getting going and proving that they have something the market wants and that they can deliver in a profitable fashion).

What do you do, therefore? Robert Craven says "run as fast as you can". As soon as you start going down the route of having employees, sprint like crazy to get through the valley (watching your marketing, operations and financials like a hawk) to get to the other side to sustainable profitability from where the sky's the limit.

We had been gradually coming to this conclusion - having been thinking a lot about the advice contained in the e-myth recently, and wanting to have the directors spending more time on the business rather than in the business - the inevitable conclusion is that you need a bunch of people to do the work! Our team has already grown significantly this year - we hired Emily as account manager in March and my brother, Tom as head of search marketing just recently - and now we're recruiting again - looking for a graphically-talented web developer. If you know anyone, please point them at our online application form.

In order to accommodate this growth (we have a full-time graphic design intern for about 8 weeks starting on Monday as well), we are frantically looking for new offices. We want to stay south of the river - probably in SE1 - either in the Waterloo, Elephant & Castle or London Bridge / Bermondsey area and are hoping to push ourselves and get somewhere big enough for this next stage of expansion (perhaps we'll find a company we have a good fit with, who we can share an office with).

##How to hire employees

Another piece of advice from the seminar that has stuck in my head is that Robert said there are two ways to hire good employees successfully and that you shouldn't be putting out adverts and vetting applicants yourself (and I'm not sure I agree with this - but I'm certainly thinking about it hard):

1. from your network (this is obviously the best possible way - and part of the reason for this post - please point anyone you know who is interested at our online application page) 2. using a professional recruitment company (which I have so far shied away from on the grounds of cost)

We found Emily by doing our own advertising. So far, with our new opening, we are finding that our online application process is helping filter out some of the dreadful applications we have had to trawl through in the past, but we're struggling to get it in front of enough good applicants so if our network doesn't throw someone good at us soon, we're going to have to consider getting the professionals in.

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About the author
Will Critchlow

Will Critchlow

Will founded Distilled with Duncan in 2005. Since then, he has consulted with some of the world’s largest organisations and most famous websites, spoken at most major industry events and regularly appeared in local and national press. For the...   read more