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Why Small Businesses Aren’t Hiring… and How to Change That

In the Harvard Business Review, the above referenced article by Jeff Stibel claims that the real reason small businesses don't hire is not about cash flow, but an investment issue. He states, "We tend to equate job growth with business success but the reality is far more nuanced than that. Adding jobs is a capital investment, not a cash flow issue. In other words, crude as it may sound, additional employees are hired for future growth, similarly to the way business owners purchase computers, software, and other capital goods. For large businesses, the cost of employment is relatively low, so this point becomes largely academic." Is this the reason you haven't hired (assuming you consider yourself a small business)? Or is it a cash flow issue, plain and simple. You don't have the cash to pay for new employees?

Answers

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

Cash flow issue and lack of faith in market growth. We don't want to have to make unneccessary layoffs, so we don't hire. Like most companies we tend to be reactionary, instead of proactive, in hiring. No need for additional staff without the additional work. There again, I work in construction which has been hit quite hard the past few years.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Hiring represents an investment of time and money. I disagree with the capital investment analogy. If a personnel investment does not work, 100% of my funds are gone. With a capital investment I should be able to have some recovery. We will not hire to prepare for growth. We will react to growth by hiring. It is better to be conservative at this point.

Aaron Lowery
Title: Payroll Consultant
Company: Payday Payroll Resources
(Payroll Consultant, Payday Payroll Resources) |

excellent point Regis Q!

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Regis -

At what point do you hire. Just before growth hits; As growth hits; or During/After growth has hit.

You need to factor in many additional variables, some with higher costs depending on when the hiring is done. Some of the aggregate costs could actually be greater than total cost of the new hires payroll in lost productivity and sales.

I'm involved in one of those issues now, and it is not an easier choice nor is it easy to assign variable cost and variable income to any particular new hire.

Marcel matte
Title: CEO
Company: BMI-Cloud Solutions
(CEO, BMI-Cloud Solutions) |

I think this topic needs to be a bit more defined. Are we talking reactionary growth for Manufacturing companies? Retail, etc? As a software sales organization we look at the potential for growth in the market place to drive hiring.

So, let's say our product holds an 8% market share. Planning for 12% market share helps define the volume of business that needs to happen. If we want to hit this goal we can't wait for all sales staff to be 100%+ of quota, so we look at how many suspect/leads a sale reps needs to generate enough revenue to be profitable, then create territories that have the potential to generate the right business. We hire to fill all the territories knowing that the ROI is 18 months down the road - it's somewhat predictable risk and is proactive in nature. It's a model we've been using for years and we're seeing double digit growth even in the down economy. If you build the right plan and execute you can see growth in any economy. - Just think if all your competitors are being reactive and your proactive will your customer base look at you as being more successful? Would you be able to capture some of their business...leading to growth.

Over the last 17 years we've seen similar businesses go out of business, sell their business to a competitive company, stagnate or see very little growth. The ones that grow are those who are proactively planning. If your stagnant and your competition isn't - where will you be in 5, 10, 15 years?

Are your corporate goals to protect profits or grow the business - that's the fundamental piece that should drive your hiring strategy. We can't wait for success.

And yes - I'm a COO, so I have these same conversations with my CFO on a regular basis. Always fun, but our model is proving to be a good long term strategy..and yes.

John Taabavi
Title: Chief Compliance Officer
Company: Johnson
(Chief Compliance Officer, Johnson) |

I want to agree with Marcel on a 50% note. Strategic business planning is necessary to determine hiring levels but one needs to evaluate the Macro enviroment carefully in planning because a good number of small businesses survive on consumer demand.which is often propelled by micro factors.

Jeremy Sanders
Title: Vice President of Finance & Operations
Company: Ideator, Inc.
LinkedIn Profile
(Vice President of Finance & Operations, Ideator, Inc.) |

The "capital investment" considerations of hiring come first, cash flow second. As an outsource CFO, I've worked with several clients who want to hire, but only when hiring builds NPV. If the "project" is NPV positive, then like all capital investments, the financing - the cash flow - is subsequently secured.

Dennis Milosky
Title: Senior Controller
Company: Makena Capital Management
LinkedIn Profile
(Senior Controller, Makena Capital Management) |

I agree with the comments posted. However, I believe that the question as posed, has many facets. The comments that have been posted represent the fact that there are at least two broad categories of hiring; proactive or strategic hiring which tends to be in product development and sales / marketing and reactionary hiring based on customer demand which tends to be in production and support or G&A activities.

Strategic hiring should be based on corporate planning to achieve strategic goals and objectives. I would categorize Marcel's comments into this category. Management looks at their market share and sets growth targets and then makes hiring decisions to meet those objectives. The company knows what hiring needs to take place in order to build market share and goes out to look for the talent required to meet those objectives. That is proactive hiring.

However, the reactionary hiring does not take place until customer demand warrants it.

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

"For large businesses, the cost of employment is relatively low".

Really? What planet is the author from?

There are very, very few business of any size where the cost of labor isn't the highest single cost factor in operating expenses. Service based or production based. In a mature, first world economy such as ours, labor costs are materially larger than any other.

Keith Johnson
Title: Principal
Company: Keith E. Johnson CPA PA
(Principal, Keith E. Johnson CPA PA) |

The problem is that small business don't have the hoard of cash for the government to force them to hire like they would for big business. As I've said for five years, the only way to get out of this mess is for the government to force companies to onshore jobs and to force big businesses to hire. So far, that's been proven right. Can't do that with small business.

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

I would like to see jobs brought back to the States. I think the only way to do this though is through tax reform that makes it so expensive from a tax point of view on foreign revenue that the companies have to move the jobs back. At the same time the U.S. tax has to be more favorable for the companies to move the jobs back. But, there is a potential downfall. If taxes on off shoring become too much big businesses may just move their companies overseas completely, especially if the U.S. tax isn't reformed to make it more favorable to move the jobs.

I strongly disagree that the government should force big businesses to hire. But there again, I think when the government forces the people to buy anything that isn't needed or wanted, they over step their role to govern, it becomes dictators that dictate (synonym of telling/forcing/among others) people and businesses to do something it doesn’t want to do.

If there isn't demand for a product or service why should a company be forced to hire if it isn't in their strategic plan? Let's open the dialogue on this, maybe there is something I am not seeing.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I agree to some extent with John, you can't force businesses to hire US employees. There needs to be direct value to the business.

Job credits adds value, but there is a bigger value that can be added so the US businesses hire US employees; employees that are skilled, productive and willing to work (and employers that are willing to pay competitive wages, set realistic goals and treat employees as assets instead of pawns on a chess board).

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

"the government to force companies to onshore jobs and to force big businesses to hire."

Government "forced" hiring? Really?

I've never met a CPA that spouted such rhetoric before.

Chris Holtzer
Title: Senior Manager - Strategic Analysis
Company: Sargento
(Senior Manager - Strategic Analysis, Sargento) |

While I like the idea of forcing more jobs to the US, tax penalties have resulted in full operational exportation rather than in-sourcing. The only way tax penalties/rewards work is when they are met with equally daunting tariffs to keep foreign companies from importing finished goods. The direction is good, but it just isn't that simple. We don't live in the 1950's and we have to deal with the global economics whether we like them or not. The government can manipulate US businesses with economic and legal threat, but their reach is limited to only the US. While yes, the US is the largest finished goods market, the fact is the rest of the world is a viable playground now too.

There is a happy balance with domestic labor and foreign, but we have to stop measuring today's unemployment against pre-internet age statistics. The world has transformed and our business and economic views need to shift with it. Whenever you globalize there are winners and losers. Those at the top are hurt and those at the bottom gain moving toward equilibrium. The US still employs more than 90% of its eligible population. That isn't a horrible number, though it seems it compared to where we came from.

I am all for in-sourcing jobs, but it has to be a business decision that is right for each company, and not a government mandate. The government only messes up business, they don't help it. The best they can do is stay out of the way.

Keith Johnson
Title: Principal
Company: Keith E. Johnson CPA PA
(Principal, Keith E. Johnson CPA PA) |

Yeah, but everything else we've tried hasn't worked like hiring tax credits. Carrot didn't work, bring in the stick unless someone can find a better solution.

Anonymous
(Founder) |

As I recall, when government lived closer to within it's means, was smaller, tried to control everything including business a little less, had sensible limits on public assistance, borrowed less and created less uncertainty for employers and investors, things went a bit better and the economy expanded and more were hired.

That was a long sentence!

So, yes Keith, we have tried most every thing else... it's just been a while since what I describe was tried.

Some things did work.

Forget carrots and sticks. Put them both away and don't think of government's proper role as in charge of the economy. Government only creates prosperity by limiting it's real power, which is mainly the power to destroy.

Ask yourself, is there government shortage? Is there a regulation shortage? Is there a tax shortage? Is there a government borrowing shortage? Is there an uncertainty shortage?

Seriously.

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