How do you find the balance between seeing the best in people, and knowing when to fire them?

Firing someone isn't fun for anyone involved.

You have to remember that it's strictly business. When it's been determined that the employer and the employee are no longer mutually beneficial, it's best to part ways. If the employer is no longer a benefit to the employee, the employee might look for a new job and quit the present one. Or, in your case, an employee might not benefit the company, and when that employee becomes a burden, it's up to you to take responsibility and do something about it.

It's not about punishment. Yes, there are situations that call for punishment of some sort, such as a suspension, a demotion, or as little as a verbal warning or write up. But, the goal here isn't to punish. The idea is to rehabilitate, to teach the employee a lesson in an effort to make business better.

It's good that you don't come to the decision to fire someone so easily. That's a respectable position in management. I'm sure that an inadequate employee has his merits, or the company may not have taken them on in the first place. The first choice shouldn't be to fire, but to work with someone to achieve the improvements you seek.

But, there can come a time when you've done all you can, and it's sink or swim for the employee. It's not an easy task, and that's the way it should be. No one wants to come across as draconian, and I'm sure you're no different. That's why you should try to leave the ultimate decision to the employee--not in their words, but in their actions. And when they prove themselves to no longer be a benefit to the company, they have ultimately dug their own grave.

I hope, as I'm sure you also hope, that you don't have to exercise your authority to can someone very soon, or very often.