Several clients have asked me recently, particularly the owners of high-growth recruitment businesses, to explain when they should start hiring their own back-office personnel. They are feeling significant pressure on their own time (I know, I expect a lot from my clients!) and yet are wary of incurring additional salary costs.
Some worry about their ability to manage staff in functions that they do not understand themselves.
At what point does adding back office staff costs become the right investment, to power your profitability? When will it make your business more productive, not less?
The majority expect a simple answer, e.g. when you hit a sales staff headcount of X, or when turnover reaches Y, or net profit reaches Z.
Unfortunately, it’s not quite that simple!
However, there are some calculations that you may find helpful. You may disagree with my metrics, or be lucky enough to have found superb support staff at a very low cost.
Established and large recruitment businesses (I’m going to class this as 250 heads plus) still typically look for a ratio of about 5:1 of sales to non-sales staff. For these purposes, resourcers and non-billing managers except directors are included in the sales staff headcount.
Why? Because if your resourcers aren’t adding to sales, then they are just making your recruiters a very expensive hire.
In recruitment, most directors are salespeople themselves. They tend to work with clients, and some continue to do a bit of direct recruitment in person. How much of your time, as an owner/manager, is spent in direct sales activity, rather than managing others?
If the answer is more than 10%, then you are likely to need some support in terms of simple payments, invoicing, office admin, by the time you reach 10 heads.
Second, is your business predominantly a permanent recruitment business, contract, or temp? A perm business is considerably easier to run from a billing and compliance point of view. If all your other workers are contractors, ie outside IR35 or via an umbrella, then (from an invoicing and payments point of view, at least) that’s similar to permanent. It can be safely outsourced to a reliable outside agency, which may be the same organisation that you use for invoice discounting.
Meanwhile, your chartered accountants can do your VAT returns, calculate your corp. tax and provide simple monthly P&Ls.
However, if you are placing and payrolling temps, then you are likely to need someone in-house to manage enquiries, process payroll, and collect payment details, as well as pay supplier invoices, from when you get to about 20 temps. Anything else will simply distract your salespeople from making sales.
Turnover and number of transactions is key here. A business that makes £1m in sales from high-value perm placements won’t need a full-time person to process these. One that makes the same amount of sales, from smaller transactions, with credit control issues, will need one much sooner.
When it comes to finance, what most of my clients complain of is that their chartered accountants promise the earth in terms of business and tax advice, and yet fail to deliver. In my experience, very few understand the need for realistic budgets, accrual-based accounting, and cash management. I have found myself advising business owners who, because they were taking monthly dividends, didn’t know that they were taking more than the profit of the business, and were about to land themselves with a hefty tax bill. In another case, a business which had simply failed to accrue for PAYE and VAT payments, and been advised by their chartered accountant that they could take everything in the account as dividends.
So I recommend that, once you are covering all the transactional pay and bill activity internally, an experienced FD on a (very) part-time basis will be worth considering from when you hit about £1m net profit (before tax and DA). This figure is an average only.
The right person will bring not only accurate MI, but should be able to advise on grant funding, lawful tax planning, and your personal affairs.
Compliance needs will vary too. If your business is in a low-regulation sector like IT perm, you may think this doesn’t apply to you. But in my experience at least, perm-only recruiters are some of the worst offenders on compliance. You do need to check ID, even for perm applicants you are active with. Eligibility to work comes in with temps and contractors. Maintaining up-to-date terms of business, employment contracts, and policies for your own staff may encourage you to bring in an administrator who can also assist with office admin.
If you are in a highly regulated sector such as health or social care, then (I hope) you are much more clued up. In my view, you should take the significant burden of this away from your salespeople once you are trading at about 25 workers out and rising, or 10 perm placements a month. Sector requirements vary, so please don’t feel the need to justify your position to me! This function will need to increase proportionately with deals done. And I recommend you hire compliance people who are willing to deal directly on the phone with candidates. Too many deals go bad because the customer relationships are damaged by poor communications from compliance officers, or even those who see themselves as the sales prevention force!
Compliance leads me neatly on to HR and marketing, and there’s a lot more I want to tell you – keep your eyes peeled for Part 2, which is coming in February.
Wondering if your business needs the advice of a highly experienced board advisor, with experience of managing across all business functions? Then get in touch! Alison Humphries is an Honorary Fellow of the REC, award-winning developer of people and a successful MD who has taken businesses to sale in the recent past. Book a call with Alison here.