Sharp Leaders Understand Critical Financials
From Shortlist, June 2022
Many recruitment leaders lack the financial nous to build a sustainable, saleable business, with three critical areas holding them back, an advisor warns.
Regular reviews of financial statements, cash flow and budgeting, and understanding how to interpret financial reports are "really critical" skills for all agency leaders, says Navigator Consulting MD Tony Hall.
And if they don't have these skills already, they need to learn them, he tells Shortlist.
Many recruitment leaders may not have strong financial acumen "because the very important traits that have made them successful are not necessarily the ones that are required to be great at financial analysis", Hall says.
"And that's why a lot of them employ good bookkeepers or a bookkeeping service or a good finance financial manager to really run the financial side of their business."
But even for companies engaging these services, leaders need to "be across the numbers" to understand what financial reports mean and adjust the business accordingly, Hall says.
He recommends all leaders do some basic financial training to really understand how a profit and loss statement works, and how it fits into a balance sheet. "But more importantly, a simple cash flow analysis I believe is the most important."
Unlike P&L statements and balance sheets, which should be monitored at least monthly, Hall recommends more frequent reviews of cash flow.
"I see some really sharp recruitment leaders monitoring it weekly and even daily to make sure that they've got a real handle on their cash position, which is so critical. Even more so when you're running a temp or contracting book."
Another important skill missing from leaders' financial repertoire is budgeting, Hall says.
"I don't see a lot of budgeting, especially in the smaller companies... [which] probably need more budgeting than the larger more established companies."
All bookkeeping software programs now have these capabilities built in, he adds, "but I do understand why a lot don't use it because it's so far removed from their key skills which are recruitment and leadership".
Preparing for succession
For agency owners who are building a business for eventual succession, whether for sale or a management buyout, solid financials are a must, Hall says.
"Having good quality financial reports that have been updated regularly over the years gives any buyer a lot of comfort to know that the business has been well reported on and that they can make a very quick decision on the strength of that business based on its financials."
The best owners he works with "use a monthly board meeting to really look at the financials and to instil that discipline on the business", he says.
Lack of nous unattractive to buyers
Having the financials and management reporting "spot on" is the most important piece of advice for leaders preparing their agency for sale, says Bluefin Resources CEO James Hone, speaking at the recent Bullhorn Engage conference in Sydney.
Being able to properly articulate basic KPIs such as "year-to-date operating profit against gross margin, against revenue, and contract/perm sales against gross margin... and having them packaged up knowing them inside-out, is uber important", he says.
"When you're going through due diligence, you need all of that information so it's best to have it all set up and going."
"It doesn't exude a lot of confidence if somebody can't tell you their financial numbers," adds Sovereign Private managing partner Paul Masters, who facilitated the conference M&A panel.
"It's amazing how many companies don't have monthly management reports; they don't know where they sit. They can see in the CRM how they're performing but they couldn't tell you exactly what their financial results were," he says.