The hardest lesson learned throughout my time running BrainGain was cash flow woes. When the company was only two people and we had money in the bank, it was easy to overlook. But with a bloated team of 6 people and salaries to pay on a monthly basis, cash flows quickly became problematic for us.
To give some context, my business had very very long sales cycles. To give an example, we once had someone sign up on the website in February, begin interviewing in April, was offered a job in August and began working in November. We then got paid once the candidate has completed 90 days of work. This meant that it took us a full year to get someone from signup>paid.
This caused us a lot of problems throughout the months of January-June. Many of the candidates who signed up around the new year were looking for something come summertime. This meant that it would be six months before we made a solid number of placements. The cash we had in the bank had to last us until then, which meant we were burning through cash while hoping it would pay off come June.
Throughout those months I burned through the 10k we had in the bank and had to end up borrowing nearly 20k USD from my parents to pay the salaries of employees…salaries of employees who were underperforming and I didn’t have the balls to let go of. I went 20k into debt because I was clinging too tightly to the hopes of a future that never came.
Throughout this time though we were also forced to re-evaluate the business model. We changed our pricing to receive half of the payment upfront when the candidate began working. We changed our refund policy to only do a 50% return once the candidate has completed 30 days (instead of a full refund if they didn’t complete 90). We offered discounts for paying the entire placement fee upfront on the day the candidate begin working.
Most importantly though this situation taught me the importance of how paying salaries can go wrong.
When I started the business I didn’t take into account salaries of employees and how that would affect profit margins as we grew.
I see a lot of first time entrepreneurs make this mistake. Their business is profitable when it’s a one-two man show, but profit margins go out the window when they have to hire their first employee, and even more so when they have a team of 4-6 people.
For example, If you want to hire a new employee at 60k/year, you need to make sure that person can generate an extra 5k/month in revenue so that you don’t lose money on them.
So eventually I fired all of the employees I had working with me, and I went back to being a two man show for a while (my co-founder and virtual assistants). This is how I got through the months of October-December 2016.
Shortly after the New Year, I had a conversation with my father about how the nature of work is changing worldwide. I went on a rant about the absurdity of asking people to come spend their time in a physical place from 9-5 everyday. I complained people are paid for the time they sit in the office, rather than the work that they actually completed.
I vented how people receive a monthly salary, regardless of their results. In the future, I believe that people will be paid based on their execution and results, rather than how much time they spend in a physical office. If you can get the same work done in half the time as someone else, with better results, you deserve to take time off and leave the office.
Around this time I was also trying to figure out how to grow the business and make more placements. I needed to hire people, but I didn’t have the cash to hire people on salary. How could I grow the business if I couldn’t afford to pay salaries of employees?
While having this conversation it dawned on me – what if I paid people based on their execution, rather than an arbitrary monthly salary? What if I created a model where I only paid people for results?
Immediately I rushed to my phone and called my co-founder. I asked him to do an analysis of commission based salespeople and what we could pay them. I believed we could use this model to bring on board people for the two most important business activities – recruiting candidates and on boarding new companies.
If a freelance recruiter got someone to sign up, what could we pay them? Submit a resume? Got to an interview? What would we pay the recruiter at each stage?
If a freelance Business Development/Sales Rep got a new company on board, what could we pay them for each new company?
Eventually, we came up with a solid model that was financially feasible.
Now the question would be if people would be willing to be paid based on performance, rather than a monthly salary. Moreso, was what we were offering for their efforts enough money?
Then I posted some job descriptions and started interviewing people.
We quickly got a great response from both sides of the equation. Within a month I had 8 different Business Development reps lining up companies in new countries, and 8 recruiters who were headhunting candidates. Everything looked golden.
This is when the true beauty in this model shone through – Top performers rise to the surface.
While the vast majority of people who I hired did not perform – the ones who did went above and beyond – and they were only paid when they delivered results.
Hiring commission based sales reps taught me that there is an alternative to shelling out salaries. That you can pay people based on the results that they deliver.
Personally, I’ll never go back. Now I work with people on small projects to see the results they can deliver and THEN I will consider a salary if they perform well.
Too often companies invest in training their employees for 90-180 days, only to have them deliver minimal results – all while you burned through 6 months of salary on that person’s development.
Don’t fall into this trap. Get people to show you what they can deliver upfront. Get them to give results from day 1.
Is there training time? Yes, absolutely. But a results mindset can be reflected in how someone gets through training as well. They can be paid for milestones that they hit for example.
This situation with my employees taught me that you don’t need to immediately pay a salary to an employee. You can set standards for hours put in, and results obtained, and test people out before you commit to a long term role.
Start small. Focus on results. Pay for what is completed. Get value before you give stability to someone else in the form of a monthly salary.
I burned through nearly 30k in less than 6 months on nothing but salaries. Considering I was trying to raise 50k, this money could have been the difference maker in keeping the company alive instead of moving on like I eventually did.
May my hard lessons help you in your journey to building a successful company 🙂
Also published on Medium.