As many of you know, I have been running an ongoing survey at my website, www.TheRecruiterU.com that asks one basic question: What are the 2 or 3 things that keep you up at night as a recruiting firm owner or manager? Based on over 500 responses I discussed your number one headache in Augusts’ issue which was hiring and on boarding good recruiters. In this article, I will discuss your number 2 issue, cash flow.
One May evening in 1991 after a little over a year in business I sat in my office at about 8pm wondering if I would continue my operations as an owner of a recruiting firm. You see, I had $623.85 in my checking account and NO receivables, no outstanding invoices or offers pending to any of our candidates.
I still remember that night very well. What to do? Close down? If not, how do I continue with no money and about $6,000 per month in business overhead? I decided to continue as I believe quitting is a habit. When one quits at one thing they tend to quit at others and that was not me. The way I did it is that I had taken out about $30,000 in credit cards before I left Motorola the year before. I figured if I was going down, I would go down in a flaming, fiery crash!
Well I only used about $7,000 of the credit lines and things turned around. That is a whole other story! I did vow, however, NEVER AGAIN! I would NEVER borrow money to continue operations again. It was my solemn vow. The result? I never have borrowed or infused cash in the business in the last 17 years. My office “blew up” at least three times since then and I had to rebuild. Not on credit. We had a recession in 2001 and my whole office was technology, which went into depression. I rebuilt, again, not on credit.
Below are the lessons I have learned and the solutions I have implemented since that dark night in 1991. While I have lost sleep a number of nights in this business over the years, cash flow has not been one of them. Sure, I have had years where earnings stunk, but, I never worried about payroll or the bills. Here is my solution:
1) Know EXACTLY what your monthly overhead is, EXACTLY! I am shocked how few in our business actually know this. You need this number for the office and home separately.
2) Always (no exceptions) keep 120 days of operating and personal expenses in cash in a business savings account. “Easy for you to say Mike, but I don’t have that luxury!” Remember, neither did I in May of 1991, but I made a decision to after that. I cut some overhead and some non-producers as well as gave myself no luxuries or “toys” until I had this 120 day fortress in place.
3) Only pay yourself what you need to cover your BASIC expenses at home. Again, no rewards, expensive vacations, new clothes, etc. NOTHING… You get to pay your mortgage, heat your house, gas your car, and feed your family. That is it!
4) Act as if the next recession is around the corner. The only benefit to opening during a recession is that you know what the worst looks like. If you are always a little bit paranoid when running your operation you will be more alert and less complacent.
- You will be more likely to let non-performers go earlier
- You will be less inclined to increase overhead without doing a real evaluation of return on investment.
- If you take on any debt, you will have 4 months worth of payments on hand.
5) You only reward yourself and/or take out of the business the amount of cash that exceeds your 120 day reserve fund. Be careful here, if you have no receivables you may want to postpone taking out excess cash at this point as you will have to replenish your reserves. If you have receivables NOW is the time to put that excess cash to use outside of your business. On the other hand, now may also be a good time to invest in hiring, upgrading your computer system or making other investments in the growth of your firm.
6) Always factor in your tax liabilities into these numbers. The mistake I see many of my clients and peers make is when they are having good years, they are not putting aside the extra money they will inevitably have to pay Uncle Sam due to their higher earnings. This often leads to a big surprise the following April where the owner finds out he owes sometimes tens of thousands more in taxes. This will rapidly deplete if not eliminate your 120 day reserve fund if not closely watched. I use Quicken’s tax estimator to figure this out. You can also use your accountant. I recommend you have your tax liability updated quarterly and add the tax liability number to your 120 day reserve.
I understand many people enter this profession as owners from executive careers or from having been big billers for someone else. This means you probably have spoiled yourself in the past and did quite a bit of frivolous spending. What I propose is not easy, frankly, it stinks. However, I only had to do it once. When you have your reserve in place, you think much clearer in your business. You don’t come across as desperate if you are trying to close a deal. Frankly, you make better decisions across the board when you are not worrying about next month’s rent!
Bonus Tip: For more insight into growing and managing a recruiting company I invite you to enroll in the free audio program “The 7 Deadly Sins Search Firm Owners make and how to avoid them” by visiting www.TheRecuiterU.com. Your first module will be emailed instantly and you will learn strategies you can implement immediately to build a search firm generating several million in revenue from some of the simple mistakes made and witnessed by author Michael Gionta in his 19 years building his own multi-million dollar firm. Additionally, Michael works with owners of search firms who have plateaued and want to break through to the next level of revenue and success.