Building a Financially Robust Recruitment Business: Key Strategies for Success
Recruitment has a dynamic and competitive nature. It can be volatile and unpredictable and therefore requires prudent financial management to maintain a robust business model.
Establishing a successful recruitment business goes beyond just securing a steady stream of clients and candidates. It involves strategic financial planning, astute resource allocation, and plenty of risk management.
[Below is a blog interview exclusive by Recruitment Entrepreneur Middle East Local Partner Melissa O'Neill and Recruitment Entrepreneur Global Investment Director Jamie Lusk]
Speaking from personal experience I can state without doubt that the vast majority of your business financial security comes from fastidious and prudent budgets and forecasting.
I speak to so many incredibly talented recruiters thinking of going out on their own to start up their own recruitment businesses and one of the key weaknesses or concerns I see – from them as well as me as a potential investor, is that there is a lack of confidence in the financial governance space. Usually born out of a lack of experience which is, of course, to be expected.
Seeing these patterns and common concerns pop up in conversations and pitches I recognised that this is common a fear amongst would be founders. So, I sat down with Jamie Lusk Global Investment Director at Recruitment Entrepreneur International to get insight as to his top key financial skills that every early-stage founder needs to learn.
Melissa: “Hi Jamie”
Jamie: “Good to see you, how's the desert?”
M: Let's dive straight in because I know that you are a busy man.
Your position as Global Investment Director for Recruitment Entrepreneur International is, in my opinion, one of the most crucial within the programme and business as a whole. The reason I feel that way is that you are involved with our investments before they even become portfolio companies which affords you a unique influence and perspective in the support that we provide at RE.
As part of the investment journey with us you oversee all deal assessment from our side but also work with our prospective investment founders to build their proposed business plans and lay out the vision for their future company. Which effectively means that every business we invest in or founder we back comes across your desk and is in part formed off the back of your work and support to the founder.
You and I both know that this makes what you do sound a lot simpler than it is in practice. You need to factor in nuances, legalities, market factors and customs of multiple industries across 17 global jurisdictions and do it whilst ensuring complete guidance to our prospective founder.
I shan’t insult you by asking how on earth you find the time but I will spend this time picking your brain for your expertise please, because I know that you share my belief that the success of any business and the first step in building a financially robust model is to plan, plan, plan, revise and then plan again. Be so clear with what it is you’re setting out to achieve that there is no question as to the upcoming results.
J: Its very true. And fundamentally, despite localised nuances like you mentioned, for which thankfully I am able to lean on our global Local Partners or our local Country Managers, there are key models, methods and factors that are common across any recruitment business that when addressed in a concise and considered model upfront form the frame work of a business that we at Recruitment Entrepreneur know can succeed.
M: Setting that foundation early on, a strong but realistic 3 year budget, Structuring an investment deal that supports a focussed execution of the business plan and ensuring sufficient capitalisation are a few obvious points that need to be considered but what would you say is the top common skill deficit you notice with first time founders that represents an early opportunity for them to set the ball rolling on their own development in this space?
J – Well you’re right of course. Those fundamentals are crucial for setting the stage for success but I have to say that if there was one skill or development point that I personally urge first time founders to prioritise its that of cashflow management. Nothing will kill a recruitment business quicker than cashflow, it is quite literally the lifeblood of any business, but with its traditionally success-based model this is even more prevalent within recruitment.
M: So how do RE support their investments and founders with that given that this will all be very new to them?
J: As we have discussed, this comes down to careful planning and tight management from the get go. Business plans are built out conservatively and taking into consideration localised nuances. For example, in your neck of the woods we know that the average fee rate is very good but payments and collections can be notoriously late. So extended debtor days are something that we would build in to our models for this region. All the while educating the founder on this model justification. Now, a first time founder might well be out of their depth with this and so our local partners support in putting in safety nets and founder support with invoicing and collections processes, spending delegations of authority and a system of checks and balances when it comes to forecasting to ensure that cashflow is managed without risk.
Our standard investment model is also structured as a drawdown, which means once the final investment is agreed and the legal paperwork is completed the investment is deposited to the business in tranches as it is required and measured against the agreed business plan. We find that this is one of the key measures in those early days that really contributes to the founders development in the cashflow management space as they become a part of the process of the investment being bought into the business.
Finally, and to be honest, most crucially for the founder, the emphasis in these early days really is revenue generating.
Get ahead of your business plan. We purposefully set out a 90 day launch plan whereby 90% of the set up, infrastructure, bank opening, website design and team hiring could be done by our team. Locally and internationally. Freeing up the founder to do what they do best and deliver on the business of recruiting. Secure revenues as swiftly as possible. Everything else becomes a lot easier with cash in the bank.
M: You are not wrong! Speaking purely from my 12 years building and running recruitment businesses in the middle east I can honestly say that this is the one common theme that I have seen over and over, and the collections point is something that I know my peers locally will resonate with.
So when it comes to planning ahead then and managing that cashflow risk what is some of the advice that you would give to first time founders?
J: Diversify your Revenue Streams! Certainly stay focussed, and don’t bite off more than you can chew in the early days. But, don't put all your eggs in one basket.
Diversify your services, you can create multiple revenue streams and reduce dependency on any single source of income.
The traditional permanent recruitment model is usually a success based fee and although if managed closely this can be very lucrative building a business model that incorporates consistent alternate revenue streams not only hedges some risk to the business but actually builds the intrinsic value within the business a lot more. I would certainly always advise first time or prospective founders to consider adding related services within their model such as HR consulting, talent management, contracting and executive search to their business but balance this with a realistic roll out of execution to ensure that an early stage team is not overwhelmed.
At Recruitment Entrepreneur we always build out a minimum of a three year business plan for exactly this purpose, of course this is going to be open to a little flexibility but this is again where that time spent up front in the planning stages are crucial for the integrity and financial health of the upcoming business.
M: Have you ever seen this done badly or mismanaged?
J: Absolutely! Which is to be expected. And that’s why I personally believe that a new first time founder cannot give themselves a better chance than bringing in partners and a support network who have been there and done that and can truly guide them from a vested position. Nobody cares about the success of your business the way you do, except for your business partner.
M: So on those occasions where you have seen existing founders go through the RE investment journey with an existing business that they have built, is there any “red flag” that you see consistently that suggests perhaps things aren’t as financially robust as the founder might like to think?
J: Founder dependency is the biggest one for sure, and truth be told not uncommon. It’s a classic marker of what we would consider a lifestyle business. The client relationships are held by the founder themselves, any team that exists around the founder delivers on business generated by them and although the business might be doing very well profit wise, if the founder were to be removed the business itself ceases to really exist.
More often than not it's also within these lifestyle set ups that we see ingrained poor financial risk management.
Chances are the founder is actually a lot more stretched than they thought that they would be when it comes to supporting their business. Market volatility, late payments, and general business disruptions all impact the financial stability of the business and so a single founder without much of a support network or management framework is unlikely to have implemented a risk management strategy. Things like maintaining an emergency fund, insuring against key business risks, regular financial health checks and tight collections processes. All of which at RE we look at from day one. Maybe even day -120 if we are honest about it as our approach to business planning and the pre-investment work that is done really lays out the solid foundation for all of our investment businesses that we know will set them on the right path.
M: Jamie you’ve been a star, thank you for this. I know you’ll need to get off back to the day job so I’ll let you go but I'd be remiss not to highlight what an asset you and your work have been to the launch and ongoing success of Recruitment Entrepreneur Middle East and our portfolio company Diverse Resourcing. It is on an almost weekly basis that Jamie Marland leans back into the support you give him as a founder. So a hearty thanks for your hard work and support.
J: As always, its my pleasure. Give my best to the REME team!