Running a recruitment agency can be tough, but equally rewarding if you get it right and avoid the common mistakes that new recruitment agency directors make. These mistakes can be easy to make, but they can also be easily be avoided. Take a look at ten of the most common mistakes new recruitment agency directors make below.
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Every successful recruiter has a niche industry that they have built up relationships with clients and candidates over the years to make placements with.
However, when these recruiters decide to start their own recruitment agency there is a temptation to believe that these clients and candidates can be easily moved to their new business… which may not always be the case.
Often employers will have restrictive covenants within the staff contracts which restrict contact with these clients and candidates for a number of months, which means the recruiter will have to avoid these during this period of time.
Also, it is worthwhile ensuring that these clients are also happy to work with a small, new a start-up business or they may not be tempted to leave the previous agency relationship.
TBOS TIP
When planning your new recruitment agency, ensure you check your staff contract to see what restrictive covenants may be imposed by your previous employer as you do not want any legal action against you in the early days. Also ensure that the relationships you have with your clients are transferrable to your new business and are not based on long-term PSL agreements.
Most new agencies will look to create some financial projections for their first year so they can have a good idea of how much money they will earn based on taking a large portion of the profit from each placement made.
Unfortunately, year 1 of a new recruitment agency is not an easy one as there are the set-up costs, the time taken to put the infrastructure in place and build your reputation under your new agency name.
It is therefore advisable to do your research into the actual costs involved in starting and running a recruitment agency and be very conservative on the sales numbers to ensure that you can survive the first year of trading both with anticipated cash and an income for yourself.
TBOS TIP
When starting your new agency, it is advisable to have at least 3 months’ salary as a backup due to the time it takes to set the company up, make that first placement and receive the money from the client.
One of the biggest mistakes you can make to win business in the early days is to try and undercut your competition or offer a discount to your clients.
We often see that these methods backfire as clients will then expect these reduced rates on an ongoing basis which means you will under paid for the hard work you have put in to fill the client’s brief.
This practice may also lead to you receiving all of the jobs that the other agencies cannot fill which will waste your time when you could be spending it on better quality jobs on a better fee return.
TBOS TIP
Understand your worth as a recruiter and have a profit margin percentage that you agree you will not go below. This does allow some negotiation but not to the point where you are giving away your services for free!
Company financials can seem like a minefield to a new recruitment director, especially when they have not had the experience of running a profit and loss account, managing cashflow or have an understanding of company taxation.
It is important to understand that the funds held in a company bank account will also include monies owed to HMRC (PAYE, VAT, Corporation Tax) plus any funds due to suppliers for services rendered.
Also, Directors can only take a dividend from their company if the business is making a profit after corporation tax so you need to understand if the company is solvent before this can occur.
TBOS TIP
Engage with a good back office/accountancy service who can provide you with management accounts to help you understand the company position regarding profitability and available cash. This way you will not fall foul of HMRC and can take funds from the business which are available.
The first year of any new business is full of uncertainly so it is advisable to avoid engaging with suppliers who require a longterm contractual agreement. If you cannot maintain these agreements then you may end up with large exit fees or even judgements against your name.
Taking out office leases or company car contracts at an early stage should be avoided until you know you have sufficient income
to support these agreements.
It is advisable to also assess the best method of funding your contract/temp placements as often invoice finance facilities will require a long-term agreement and have monthly minimum fees as opposed to pay-and-bill solutions which are based on a pay-as-your-contractor-works scenario.
TBOS TIP
There are various ways of funding your temp/contract placements so it is advisable to speak to an expert who can find the best solution for your agency to ensure that it not only meets your short-term needs but also your long-term plans.
Managing cash-flow is vitally important when running a business, especially if you have come from being an employee and being paid a salary and commission on deals that haven’t yet been paid.
When you make a placement, it is important that all the paperwork has been completed, the invoice has been raised correctly and has been received by the client. This should ensure that the client makes payment within terms although it is best to monitor this situation. Only once the funds have arrived into the company account can you then start deciding on how the funds should be used
TBOS TIP
Verify every invoice with the client to ensure that it has been received, it is correct and that it will be paid. 7 days before the invoice is due, contact the client to ensure that the invoice is on the payment run and when the funds will arrive. This should ensure that payments arrive on time and not affect cash-flow.
On many occasions, TBOS has heard that a new recruitment agency already has contract templates in order to start making placements. Often these types of contracts have been “borrowed” or “acquired” from their previous employer or have been downloaded from online templates for free.
As the legal rules and regulations can change on a regular basis, it is advisable to purchase new and up-to-date contract templates via a reputable provider. This way your new business is protected under any new legislation and ensures that any placement you make should be paid without any legal challenges.
TBOS TIP
Find out which templates you will need in order to run your agency as there are many different types based on if you are making permanent placements or filling fixed-term, PAYE temps, umbrella or limited company contractors. You should also consider staff contracts if you are taking on other consultants or admin staff.
The focus of any new business should be about making that next permanent placement or filling that next contract role to grow the top line each month.
However, whenever this growth starts to slow down, many new business owners will start to look at the costs within their business instead of spending more time finding that next placement.
This exercise can be a big distraction for the director and often mean that services that the agency really needs to make thenplacements may be stopped causing a spiralling chain reaction.
TBOS TIP
Growing a solid contractor base where the profitability each month covers the cost of the overheads will relieve the pressure on the company’s books and then any permanent placements made are bonus money in the company pot to aid cashflow or be taken as dividends.
Taking on a new staff member within your recruitment agency can be a good way to grow a business if you get a good hire from the start.
However, employees can be one of the largest costs on an agency profit and loss sheet as it impacts salary and commissions, employers’ national insurance, pensions and employee benefits plus the desk costs such as rent, computer costs, telephone bills, etc.
Also, any new recruiter can take between 3-6 months to start billing enough to cover their costs plus take time to train and manage on a daily basis which can have an impact on the time spent by the director or other staff members.
TBOS TIP
Ensure that your recruitment agency has the financial capacity to pay for any new hire for at least 3 months in case they do not bill during that time. Also, be strict on monitoring their progress to ensure you do not keep them on should they not meet the targets you agree on..
When a director starts their new business, they will often believe that in order to reduce cost, that they could do many of the jobs themselves instead of paying an expert to do this for them. This may mean that they raise their own invoices, setup their own laptop or create their own posts on social media which may not be done correctly or take up valuable sales time.
By not engaging with experts to outsource services such as back office, accounts, marketing, IT and HR, this can be a big time and cost distraction that could hinder the growth of the business in the early days
TBOS TIP
Try to speak to other recruitment directors in the industry to find out what services they outsource and to where, and try to use technology and providers to do as many tasks as possible that are not recruitment.