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SME Pitfalls

The challenges faced by entrepreneurs both in the recruitment sector and the wider business arena are many

The UK recruitment industry, has an annual turnover of £27 billion and the majority of operators are SMEs. It's interesting to note that many of the SMEs that we support through our intensive development schemes, don't actually need cash - they need mentoring, support and advice on exit planning. The problem is that they often go unsupported and fail to deliver significant turnover and value in line with the owner's vision.

The challenges faced by entrepreneurs both in the recruitment sector and the wider business arena are many and varied but most have two burning issues: creating value and exit planning.  One of the biggest mistakes we see being made by entrepreneurs is the ‘Porsche and Rolex effect'.  This typically happens in year three of a new business where years one and two have been very successful. Instead of keeping a ‘war chest' which can be used to invest for growth, owners reward themselves for their success and hard work - but it's just a tad too early! They don't seem to understand that to create real value and work towards an exit strategy, it's vitally important not to rape the business of all its cash! Maintaining sufficient working capital to meet both liabilities and requirements for future growth, as well as maintaining that ‘war chest' to facilitate any short term problems, really is a no brainer - so why don't more of them ‘get it'?

In terms of planning an exit strategy, it always amazes me that this is not one of the first things entrepreneurs think about when drafting an initial business plan. Whatever their strategy is, they need to know what it might look like. If it's an MBO, are they putting together a team of sufficient calibre and planning to recruit the very best? If they are looking to be acquired what might the organisation look like and what would they be looking for?

When we look at investing in and/or supporting recruitment businesses - these are the questions we ask ourselves:

How good are the contracts/customer relationships/preferred supplier agreements?

What are the revenue/gross profit/operating profit run rates at in relation to the industry as a whole?

How good are the staff in terms of billings and longevity of service - is there a history of training and development and if the principals exit the business who would be good enough to run it?

Are there enough clients, sectors and disciplines to ensure a good business spread?

Do the principals know their daily cash position, are their borrowings at the most competitive interest level and what does the debtors book look like?

Have they negotiated the best possible deals on costs such as leases and funding arrangements?

If only business owners asked themselves these questions a bit more often!

by Poonam Mawani Group Financial Controller HB RIDA Ltd

More Stories By John Funnell

John Funnell has worked in online media for over ten years, after achieving his First Class BSC Hons Degree (BBC Sponsored), John won Bos 18-21 Princess Trust Entrepeneur of the year at 21, setting up Clean Living Records Ltd (including www.BeatReview.com) with great success having many acts that charted in Europe and Canada. After selling the business John looked for a new challenge and joined GDS International, having a successful career in sales and Delegate acquisition, he worked up to Event Director EMEA, forging contacts with some of the biggest technology names in the world, this lead to John having a lead role in the creation of MeettheBoss.com and MeettheBoss.tv – the worlds largest business IPTV channel. John then took over as Marketing and Communications Director and ran a multifaceted global Marketing team for GDS International in New York, Sydney, Kuala Lumper and the UK.. John joined Global in 2011 with the challenge of supporting its growth by developing a solid Marketing foundation through various Digital, PR and brand initiatives.

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