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Why do recruitment businesses fail and how can you avoid this?

Why do recruitment businesses fail and how can you avoid this?
Lack of industry knowledge and experience

It may sound straightforward, but many people see the recruitment industry as pretty simple. You don’t need any qualifications, and anyone can do it, right?

In theory yes, but as all experienced recruiters will tell you it’s not that easy! The fact you don’t need any qualifications makes it even harder, you can’t just learn it from a textbook, you need first-hand agency experience.

When I first started recruitment, the dropout rate for entry-level recruiters was at least 1 in 2. It’s a tough industry and many don’t like it and decide it’s not the career path for them.

There are also experienced recruiters who may be tempted to set up in a whole new sector. Similar pitfalls may await though as yes, they know how to do the job of a recruiter, but they lack the contacts and industry knowledge to make this as successful as they could if they focused on their area of expertise.

SSG-Partnerships-Recruitment-Startups-Lack of Industry Knowledge & Expertise

So how can you avoid this if you want to set up?

If you are new to the recruitment industry, then working for an agency first for a few years will give you the right foundations to learn the role and develop your industry knowledge and a client and candidate network.

If you are an experienced recruiter, then focus on your previous successes within your sector. Branching into other sectors in the future is always a possibility but make sure you have built the business up to a level where can you expand.

Failing to Plan
 The old saying “failing to plan is planning to fail” may ring true.

When starting your own recruitment business, it’s important to plan how your business will be successful and what direction you want your business to go in. For example:

  • What are your restricted covenants and how do you plan to win new business with these restrictions in place?
  • What is your market?
  • What roles will you be focusing on?

Being niche is quite important in the early stages. It can be very tempting to work any role with any client that comes in to generate as much revenue as possible but spreading yourself too thin can mean you lose focus and be counterproductive.

Putting a business plan together will help to focus on your key objectives short-term and long-term, your market, sector, geographical area, competitors, your USP, tools you will need, growth plans, etc.

Of course, not everyone has experience in putting together a detailed business plan but there are useful tools and expert advice that can assist you with this.

Cash flow

 When starting a recruitment business, you need access to the right kind of financing, and what is right for one start-up may not necessarily be right for the next. Many founders expect larger banks to be less agile and more onerous than smaller challengers. In many cases, some start up recruitment agencies were using their personal savings – or taking loans from family and friends – as a source of finance. This is known as bootstrapping, and 62% of start-ups did this during the pandemic.

This is probably the biggest reason why recruitment businesses fail. The outgoings become higher than the money coming in and the money they have used from savings or borrowing. There are overheads to consider, CRM, Jobs Boards, Tech support, Accountants, Payroll and Factoring of a temp business, and Legal advice. These bills need covering month in, month out, and then what if your client doesn’t pay their invoice on time?

It is so important to budget before even starting. Putting together a detailed first 12-month forecast can be beneficial here. Be realistic, it’s better to underestimate and over-deliver to account for a worst-case scenario. Consider payment terms from clients. You will not be generating money from month 1.

If you are a temp business, consider building the temp numbers up from scratch, your average charge rate, pay rate, and GP. As a perm business, you need to consider how long it takes to work a role, get the job on, source candidates, interview processes, notice periods, etc. and what your average fee is?

With this in place, you will have a solid understanding of the revenue you are looking to generate, and your turnover. Your overheads then need to be deducted from this to give you your Gross Profit. Then it’s time to remember the tax man, corporation tax is then deducted from your GP to give you your Net Profit.

If you are unsure of how to forecast and budget for this then don’t worry, there are experts on hand who can guide you through this process.

Cutting Costs

Many people think setting up a recruitment business can be done on the cheap: “Just give me a phone and laptop and I’ll do the rest.”

If it were that simple, then everyone would do it, and whilst yes, it is possible to set up a recruitment business on that basis alone what would that mean in practice?

Well, how is your business protected? What insurances do you have in place, and are your terms of business fully compliant? Are you GDPR compliant with a suitable CRM? How will you attract candidates without Jobs Boards/LinkedIn etc? Will anyone trust you as a business with a shoddy website or no website at all?

Ask yourself what is more important to you, cutting costs or increasing profits? Unfortunately, they don’t go hand in hand.

Increasing the profits of the business is the most important thing. If you got to a certain level of billings by using specific tools, then those will be essential for you to continue your successes as a business owner.

It’s all very well keeping the costs down but if you cut too many corners you won’t have the correct infrastructure in place to make it a success anyway.

This can easily link back to your business plan and forecast. To achieve your billings what is critical for you and your business?

Lack of self-awareness

 You decided to set up your own recruitment business likely because you have a proven track record of being a successful recruiter.

So, what do you know about recruitment legislation? Back office? Managing payroll? Branding? Marketing?

When you set up your own business you suddenly have 2 roles, that of a recruiter required to bill to generate revenue for your business and that of a business owner who is required to ensure all admin, accounts, payroll, tech, etc is compliant and operates efficiently.

This is by no means an easy task. Many recruitment business owners who opt to take on all these responsibilities will be spending at least one day but perhaps two days a week focusing on non-recruitment-related activities. That may not seem like much, but that still leaves most of the week to focus on recruitment, right? Well, how will that affect your income? Say it was only one day a week, that’s 20% of your billing time. Therefore, if when working out your budget and forecast for cash flow you anticipated billing £120k in Year 1, this will be more like £96k with all the other responsibilities and 3rd party suppliers you will have to deal with.

It's crucial to recognise your strengths and weaknesses. Recruitment is your strength and focusing on delivering results for revenue is your most important task. Don’t be afraid to delegate. Seeking assistance to help with your back office and payroll functions, your website and tech support as well as admin assistance will pay dividends in the long run.

Grow too quickly

 If you aspire to be the next biggest agency it can be tempting to bring in staff as quickly as possible.

There’s nothing wrong with this so long as you are hiring when the business can take on staff. Many feel hiring entry-level will be more beneficial as they will cost less but what value will they add to the business? How long before they begin to bill? How much of your billing time will they take up for training? What if they don’t like recruitment?

Hiring the right staff is key and to find out more about this check out our dedicated article on Hiring Staff. 

Can you ensure that you fully avoid failure?

 Quite simply, no. That is the nature of business and recruitment, unfortunately. There are always ups and downs, highs, and lows but if you take all the above into account you will be 100% on a more proven path to success.

If you are an experienced recruiter and thinking about starting your own recruitment business, pick up the phone and have a chat with me today. It’s natural to want to succeed in life by your own efforts and we are currently supporting over 200 UK-based recruitments start-ups launch and grow. We understand you maybe currently employed with a recruitment business and you may need to talk ‘out of work hours’ so feel free to book a call here.