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Anyone who has ever started a business, particularly if they’ve bootstrapped the start-up, has experienced a major moment of indecision: When do you hire more people?
On one hand, you want to keep staffing as low as reasonably possible. The more people you bring on, the less money available to cover your own contribution or to invest back into the business. However, put off hiring too long and you can hamper growth and damage relationships with customers because you become unable to keep up with business.
No one from the outside can tell you when should hire more employees. To know when to expand your workforce, you need to ask yourself some fundamental questions about your company, where you want it to go, and what is happening now.
1. What kind of business do you want?
Not everyone wants a big business. Many would rather concentrate on a smaller one and be closely involved on many levels, because there are rewards to business other than just money. As you grow a business, you may have to become disengaged with parts that give you pleasure, because you’ll spend more time on the overall operation and have to delegate more aspects.
Also, you’ll have to channel more cash into expansion, which could mean having to lower your own compensation and standard of living for some time. Some find that a proper tradeoff, while others are unhappy with the transition or ultimate result. Consider what you want from the business and whether you have the necessary patience to personally move backwards for a while to hit the bigger time.
2. Can you throttle back growth if needed?
With some businesses, you have more control over growth. For example, if you offer some sort of personal service, you can restrict your customer base and pass along additional business to colleagues.
In other types of business, you may have less control. Selling a product online puts you more at the mercy of the business that comes in. If your offer becomes hot for some reason, you may become inundated with orders and then be obligated to fulfill them. Depending on the type of business and demand, you might find that you have to expand and hire more people.
3. What is your growth like?
Many entrepreneurs get excited when they see a rush of business. They assume that the proper response is to expand to meet demand. But growth may be momentary rather than continued. Have a product get unexpected publicity and you might see a sudden uncomfortable increase in orders. Once the exposure has run its course, usually in a relatively short period of time, demand could drop back to previous levels.
Before deciding on growing your staff, be fairly sure that the increased workload will last long enough to justify them. If not, consider overtime and temporary help to bridge the temporary gap.
4. Are you suffering from growth?
Entrepreneurs typically have to have healthy egos to believe that they can succeed when others says they will fail. The character feature can become a flaw if it starts to run unchecked. One subtle way it can express itself negatively is in desiring the trappings of a larger business before they are truly necessary. If you’ve grown too quickly, you may notice a rise in the number of customer complaints about service or employee concerns that they cannot keep up with their jobs. The action you choose may be more efficient business processes. But if you still can’t adequately handle problems, it may be a sign that you do need more help.
5. Is there outside help available?
Needing more help is fine, but do you need to hire in-house? You might have business processes that could be outsourced to other companies for a reasonable increase in variable costs you can handle through pricing rather than the fixed business costs of permanent employees. That way, your business can more effectively respond to changes in demand. Some areas to consider might be call centers, fulfillment, or accounting. Moving some tasks outside the company frees internal resources to do the types of work that are core to the business.
6. Do you really need help?
It may be that you can handle some tasks internally more easily than you think. An example: Do you really need a full-time bookkeeper, or are there still a few hours a month where you could personally enter numbers into an accounting system and have an accountant review the work? Are there other tasks you could take on, freeing up current staff to handle orders and customer concerns?
Be most wary of hiring additional executives until the business is really cooking. Even a vice president of sales may be ineffective if the company does not have sufficient revenue.
7. Are you ready for the short-term profit impact?
Growing a business typically has a strong hit on profitability. You ramp up for where you think the business will go within the next few months. That means temporary excess capacity that adds more fixed costs, including benefits, worker’s comp, and additional payroll taxes. These additional costs get distributed over all your sales and cut gross margins until growth catches up and restores a more normal balance.
As you can’t both grow the business and generally cut expenditures at the same time, the hit will be to profitability and possibly your personal income. Do you have the capital to support the growth? Are you prepared, if necessary, to reduce your personal expenses and plans to help underwrite the growth? If not, you will find yourself at war with what you want to do for the business, ultimately hurting everything.
8. Are you set up to handle more employees?
Finally, your startup needs the processes, procedures, and organization to handle a sudden influx of employees. They will all need orientation, training, and management. There might be additional federal or state legal requirements should the staff size expand to certain numbers. You may need additional office space, equipment, and software licenses.
Hiring employees is a big step for a new business. Do your homework, consider the implications, and be ready so your company can continue to be successful.
Erik Sherman‘s work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch. @ErikSherman
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