How to Build an HR Strategy for Your Small Business

In this article we discuss:

• Why Every Small Business Needs an HR Strategy
• 7 Steps to Building an Effective Small Business HR Strategy
• Small Businesses Can Compete for Talent—and Win

When you're running a small business, every decision matters. And few are as critical as how you attract, engage, and retain your people. Yet many small business owners overlook one essential ingredient for success: Creating a solid human resources (HR) strategy. 

Today, about half of all small businesses handle HR in-house. But research has found that 80% of small business HR decision-makers are lacking the right training, experience, and confidence to run it effectively. Many handle HR on an ad-hoc basis without a comprehensive strategy in place.

The best HR advice for small businesses? Know that an HR strategy doesn’t need to be overwhelming, and it doesn’t all have to happen at once. With the right steps, any small business can create an approach that puts people first, drives performance, and lays a strong foundation for the future.

Why Every Small Business Needs an HR Strategy

Too often, small businesses delay building an HR function, believing it's only necessary once they reach a set size. But waiting can be costly. You don't need to hire a full-scale HR department, but without clear policies and practices, HR managers can encounter serious challenges, including:

• Compliance risks: Misunderstanding or overlooking labor laws, wage requirements, or workplace safety regulations can lead to serious legal and financial consequences.
• Hiring missteps: Without a structured process, businesses risk making poor hiring decisions that hurt culture, productivity, and morale.
• High employee turnover: Without clear expectations, growth opportunities, or engagement strategies, employees may quickly leave for better-organized workplaces.
• Inconsistent management: Without formal HR policies, managers may handle situations differently, leading to confusion, resentment, and potential claims of unfair treatment.
• Stalled business growth: Without the right people practices in place, businesses may struggle to scale effectively or sustain momentum during periods of change.

The idea that smaller businesses don’t need formal HR strategies is a common but flawed misconception. In truth, having a thoughtful HR framework early on helps small businesses stay agile, minimize risk, and create a work environment that attracts and retains top talent. 

By laying the groundwork early, small businesses set themselves up for smoother scaling, stronger cultures, and a workplace where employees are empowered to do their best work.

7 Steps to Building an Effective Small Business HR Strategy

Implementing an HR strategy doesn't happen overnight. It requires thoughtful planning, clear priorities, and a commitment to putting people first. Whether you're hiring your first employee or expanding a growing team, these seven steps will guide you in creating a human-centric HR approach that supports your small business's long-term success.

Step 1: Define Your Business’s People Priorities

Your HR strategy should flow directly from your business mission and vision. Start by asking: What kind of workplace do we want to build? What skills will we need to reach our goals six months, a year, or three years from now?

Setting clear goals for your people priorities is the best route to creating an effective HR function. By taking a skills-based view—focusing on the capabilities you need rather than just job titles—you can further help your small business stay agile and future-ready.

Conducting a simple skills gap analysis at this stage can be highly beneficial. List out the essential skills for your business today and predict what will be needed in the future. Engage your current employees to self-assess their skills and aspirations. This inclusive approach can surface hidden talents, strengthen teams, and boost morale.

Step 2: Build a Skills-Based Hiring Process

Small businesses can benefit enormously from adopting a skills-based hiring mindset early on. Rather than focusing solely on degrees, titles, or years of experience, a skills-based approach prioritizes the capabilities each new team member brings to the table and their potential to grow.

Start by writing job descriptions that highlight the specific skills and outcomes the role requires, alongside your business's mission, values, and growth opportunities. This widens your talent pool, helps mitigate unconscious bias, and ensures you're focusing on what truly drives success.

During interviews, lean into behavioral questions and skills assessments that uncover how candidates have demonstrated critical skills in real-world situations. Look beyond traditional credentials and focus on curiosity, resilience, collaboration, and alignment with your company’s purpose.

By building a hiring process around skills and potential, HR professionals can empower diverse teams and create a more agile, future-ready workforce. In 2025, it’s increasingly becoming the business standard—81% of business leaders believe transitioning to a skills-based approach increases an organization’s potential for economic growth.

Step 3: Set Essential HR Policies and Ensure Compliance

Every business, no matter the size, needs basic HR policies. Create a simple employee handbook that covers essentials like code of conduct, leave policies, remote work guidelines, and grievance procedures. It doesn't need to be complicated—it just needs to be clear.

Compliance matters, too. Depending on your location, you'll need to ensure your contracts, data privacy practices, and employment standards are up to date. Don't overlook health and safety standards, anti-discrimination policies, and wage regulations. Regularly review your policies as your business grows and evolves, and communicate updates clearly to all employees.

Step 4: Create an Onboarding and Engagement Plan

First impressions last. A structured onboarding process helps new hires feel connected, confident, and productive from day one. Beyond paperwork, focus on welcoming new employees and helping them understand your culture, values, and goals.

Onboarding can include a welcome package, a buddy system, and a 30-60-90 day plan to set expectations and milestones. Provide training not just on tasks, but on your mission and the bigger picture.

Keep communication flowing as part of ongoing performance management. Regular check-ins, feedback sessions, and open dialogue build trust and signal that employee voices matter—a vital retention factor in any size organization.

Step 5: Prioritize Employee Development and Retention

Employees today—especially younger generations—expect more than a paycheck for their work hours. They want to grow, learn, and advance.

Offer upskilling, reskilling, and internal mobility paths wherever possible. Even if your business is small, you can support development with mentorship, stretch assignments, and access to learning resources. Recognize achievements and celebrate milestones.

Research from Workday found that 77% of high-growth companies have lost talent due to a lack of career development opportunities, showing just how critical growth pathways are for retention. A culture of growth keeps people energized and loyal.

When employees do leave, exit interviews, even if infrequent, also provide invaluable insights into what your company can do better to retain great talent.

Step 6: Leverage the Right HR Technology

You don't need a sprawling HR tech stack to handle your HR tasks. But the right tools can save you time, reduce errors, and improve employee satisfaction. Consider simple HR software solutions for:

• Applicant tracking: Streamlines job postings, applications, and interview scheduling in one place.
• Onboarding workflows: Simplifies new hire paperwork, training, and early engagement activities.
• Payroll and time tracking: Ensures accurate, compliant compensation and benefits, and easier management of hours worked.
• Employee surveys: Gathers real-time feedback to gauge employee satisfaction and identify areas for improvement.
• Performance reviews: Supports structured, transparent evaluations tied to skills development and business goals.
• People analytics and reporting: Delivers insights into workforce trends, helping drive smarter, more strategic HR decisions.

Look for systems that scale with you and prioritize data security, ease of use, and flexibility. Technology should empower you, not overwhelm you. AI-driven, cloud-based platforms can also help small companies centralize HR operations, analyze trends, predict turnover risks, and personalize employee development plans. Adopting the right tech early gives you a competitive edge to grow.

Step 7: Continuously Measure and Evolve

Your HR strategy can’t have a set-and-forget approach. Enhance performance by tracking key HR metrics like:

• Time to hire: Measures how efficiently you can attract and onboard the right talent.
• Employee retention rate: Offers a strong indicator of engagement, satisfaction, and cultural fit.
• Employee engagement scores: Reflects how connected and motivated your workforce feels via regular employee engagement surveys.
• Training participation and completion: Shows your commitment to continuous learning and identifies gaps.

Use the data to spot trends, address issues early, and continuously improve your HR practices as your business grows and evolves. Schedule regular strategy reviews, even if informally. Involve employees in these reflections—their feedback is critical to refining your approach.

Small Businesses Can Compete for Talent—and Win

Big companies may have bigger budgets, but small businesses have powerful advantages when it comes to attracting and keeping top talent. Agility, purpose, and culture are powerful differentiators:

• Agility: Offering faster career growth, diverse experiences, and flexible work environments.
• Purpose: Giving employees a direct connection to the mission and impact of the business.
• Culture: Building close-knit, inclusive teams where every voice matters.

Building a thoughtful HR strategy ensures you maximize these strengths. By investing early in smarter HR practices—from hiring and onboarding to engagement and development—small businesses can reduce risks, boost retention, and create a culture that fuels innovation and growth.

SMBs account for more than 75% of our customer base at Workday. Learn how Workday supports small and midsize businesses in developing industry-best HR plans.