The top 7 recruitment start-up mistakes

For nearly a decade, I’ve been totally immersed, purely in the recruitment start up and SME world and there’s not a lot I haven’t seen or heard. I’ve maintained a 100% record of never having had, or been connected to, a recruitment business that’s failed. It is for these reasons that I feel I am informed enough to list the top 7 start-up mistakes you’d be well advised to avoid.

Not Understanding Cash Flow

It’s astonishing how many start-ups don’t realise the need to understand cash flow. Placements are vanity, invoices are sanity, but cash is king. In my blog Managing Cash In Your Recruitment Business, I explain how to turn a sales forecast into a cash flow projection. If you want to know how much money you’ll need to survive in your new business before you start taking cash out, you’ll need to turn your early sales forecast into a cash flow projection.  My blog walks you through it. I also talk about the start up and running costs you may want to consider in my blog, How Much Does A Recruitment Business Set Up Cost?

Once your recruitment agency is up and running and has navigated the early sales ‘ramp up’ stage, understanding your cash flow doesn’t stop there, and as you grow and add staff, and your breakeven running costs ramp up, you absolutely must watch your cash flow. This may sound daunting but if you want to make it simple, work out the average running costs based on the last 3 months, and then keep at least one month’s running cost in the bank, and if you’re risk averse, two months. However, this alone won’t save you, additionally you do need to plan to pay your tax bills.

Not planning for tax bills

When you work for someone else, your wages are subject to PAYE (pay as you earn tax), which means what you get in your pay each month is after all the tax and National Insurance has been paid by your employer, so you don’t have to save any for tax bills. However, when you run your own business, there is VAT once a quarter, Personal Tax twice a year, Corporation Tax twice a year and if you employ staff, NI once a month. If that’s not enough, they all come at various times of the year!

What makes it even worse for start-ups is that the first Personal and Corporation Tax bills don’t come until year 2, plus when they do land, you’re not only paying for your previous year’s performance as a business, but you also have to pay extra on account of the next year’s predicted income, so you get double bills! This does sound pretty scary, but you just need to be organised and you do get used to it.

Recruiters are often risk takers by nature, so it’s far too easy for the new recruitment business owner to spend the money in the business bank account and deal with the tax bills nearer the time. But when you’re paying over 40% on the profit you’ve made (split between Corporation and Personal Tax on your dividends) and you get 2 years’ worth of personal and Corporation Tax bills in year 2, you absolutely do need to account for these bills coming in, if you want to make it to year 3!

Trying to wing it!

Getting a recruitment business up and running may seem easy from the outside to a Recruiter. It’s true that a recruitment business is hardly a sophisticated operation – no manufacturing, no stock cost, no R&D – you just bill like you do as a Recruiter to generate money. However, as with the tax example above, there is a lot more to it.

There will be a lot more things you have to do in your business that are handled by someone else when you’re employed. If you fail to think about some of these issues and just wing it, trying to deal with these things as you go along will eat up valuable billing time, and you need to be billing to survive. Also, when these things do come up, it can be really stressful trying to sort them out with no one to ask for help when you have an urgent job to fill, or a contractor role you need to back fill. If you don’t put enough thought into running your business and the non-billings issues that come with it, you really are setting yourself up for trouble.

Early success coming too easily

It’s such a shame that if you smash the placements early this can actually terminally affect your business. If you get your success early, or you have a purple patch and you find it easy from the start, this can easily lead to complacency and over confidence, and even a feeling of business immortality. All of these can affect your attitude to business risk and cashflow management can go out of the window. There are numerous reasons a business can fail but virtually all of them ultimately come down to running out of money. It’s essential you always remember that a business without money is like a flower without water – it looks lovely but can die far too quickly if the water dries up.

Being too focused on your image

The typical Recruiter’s psychometric profile is one who likes others to see them as successful, so the outward image can be particularly important. There’s nothing wrong with this, and it can be one of the big drivers for high achievers. However, this can lead to the start-up business owner being far too interested in their outward appearance. For example, having a fancy looking website and concern over how they look on LinkedIn, being obsessed with their image as a business owner could mean not focusing on what really counts, billing. If you’ve read my blogs on marketing, you’ll know my opinion on how websites are really important if you want to build a business that can generate money other than through staff, but the website is a prime example of how a business owner’s vanity can really harm the business’s chances of survival. You can have the best-looking website in your sector but if it lacks calls to action, doesn’t have sufficient SEO to be found on Google or a well-run PPC plan, you can be throwing money at something that won’t make any return at all on your investment. But it’s not just the financial cost of the obsession with how the site looks that’s the real killer, it’s the hours of valuable billing time the new recruitment agency owner can waste playing with the aesthetics of the site.

In addition to website vanity, LinkedIn vanity can gobble up valuable billing time with no return. I see lots of start-ups writing blogs to raise their profile and elevate their brand. This is great, but not when the blogs aren’t candidate or client focused, and when they’re not written with website SEO in mind. I see far too many Recruiters who blog on recruitment subjects that affect Recruiters. It’s what you know and are passionate about, but customers and clients won’t be interested in that and the content will do nothing for your SEO as the copy won’t be rich in the keywords and search strings you’re targeting.

Image won’t pay the bills, and branding is a slow burner, so billings must come first. Also try to look at websites and social media content very much from what will it really do for you, spend more time on things that are genuinely candidate and client focused for your brand building, not personal brand building in the recruitment community.

Business partners fall out

When I first set up, I did it with a business partner, so I understand first-hand how setting up feels far less intimidating if you’re not doing it on your own. However, in my blog A Business Partner Is For Life – Choose Carefully, I explain how a business partner split can be far harder than a marital breakup; you can’t simply divorce a business partner. The very early stages of your start up should be fine as you go through the honeymoon period. However, it can be when the money comes in, fall outs occur. Disagreements on decision making, feeling like one is working harder than the other, there are all manner of reasons that business partners can fall out. Having the odd argument is no problem and can actually be healthy for you to challenge each other. But once this goes beyond the arguments that are sorted and forgotten you can get a build-up of resentment and mistrust. Add to the mix that most Recruiters have some Alpha genes and a battle can grow out of control.

The blog mentioned above explains more, but in brief some of my points are: –

  • Agree ground rules from day one and treat the role as business partner as a job.
  • Get a shareholders agreement written up, which you can add in some ground rules and what-ifs. So, if for example one of you starts doing 3 days week, you have legally binding rules and resolutions in your shareholders document to fall back on.
  • Think very hard before you commit to share a business with someone. Your business should ultimately lead you to a point where you don’t need to work anymore, either it runs itself and/or you’ve made enough money so that you can take it easy. For this reason, your choice of business partner is critical, don’t just chose a business partner because he, or she, is your mate.

Not using the database from day one

As virtually all Recruiters who decide to set up on their own are good billers, if they’ve managed that without using the company database, it follows that they’re unlikely to use the database properly when they’re their own boss. When I discuss the use of the database with start-up Recruiters, they often explain they don’t use their current employer’s database as, quite frankly, the data on it is crap. So, they have in effect been successful despite an unusable database. However, having a well-run database, skill coded properly and using the time saving functions, like stripping candidates’ data direct from LinkedIn, can make them far more profitable.

But, it’s not their own performance that’s key here. If you are looking to build a business, especially a sector specific recruitment company, a slick database packed with great candidates all coded up can make the world of difference to the growth and profitability of your business. Recruiters that may have failed without it can make the grade, and failed hires cost a lost in time and money. A great database also increases the billings of all your recruiters, so they make more money for you, and it makes them less likely to leave if they bill well, so staff attrition stays low.

If you start your business and don’t use the database properly from the beginning, hire your first recruiter and they’ll most likely follow suit, and the next hire will be the same. Once you have a small team not using the database and you realise you need to rectify this, it’ll be immensely difficult to put it right. Your existing team will push back hard if you try and get them to use it, and database cleansing can be a nightmare. So, think with the end in mind and use your database properly from day one.

The Good News is it is Possible!

Now you’ve read this, please don’t be scared off running your own business. It was the best career move I ever made. But be smart, use some of these observations in your preparation. And most of all try and find someone who’s been there to help you. I set up Davidson Gray for this very reason – to help Recruiters who want to start their own businesses. If I knew then what I know now, when I first set up, I’d have made twice as much money, twice as quickly and with half the effort!

Rhys Jones
Written by Rhys Jones Managing Director – Davidson Gray

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