When looking at a firm as a future employer, candidates do due diligence. They investigate all public information on you and from that, they form a view about you as a future employer. It’s just the same as you might expect a professional customer or supplier to do. The customer wants to know if you have the finances to complete the work and the supplier wants to be sure he’ll get paid for the work done.
The level of due diligence done by candidates reflects their competence, or that of their family and friends, in finance and in understanding the information available to them. Let’s consider what a reasonably astute candidate might look at and what they might conclude from it.
If you’re a limited liability firm or partnership, they’ll have access to all your previously filed accounts. That’s only your balance sheet and company record but these tell some important stories.
- Your net worth (the bottom line of the balance sheet) tells how much money is in the firm if it stopped trading tomorrow. So if a candidate sees a negative value there, it rings alarm bells because you’re trading insolvent and may not be able to pay his salary. Even if the figure is positive, a quick division of this by the estimated average monthly salary times the number of employees tells roughly how many months you could limp along in a downturn with significantly reduced business.
- Often small firms are supported by their directors. Directors’ loans are used to inject money into the balance sheet to stop the firm trading insolvent. Generally there’s a statement in the accounts that the directors won’t attempt to take their money out. If they do, the firm will fold. Some candidates will be worried by this. It’s not desirable but at least it shows directors’ commitment to the firm.
- Then there’s the company or partnership records showing the directors and changes in directors over time. Directors in all firms come and go, but frequent or unusual changes ring alarm bells for candidates. This shows lack of stability and potential feuding in the management team. Likewise, of course, any unusual changes in registered address. Again firms change this but not without some plausible explanation.
- The balance sheet shows little on the turnover of the enterprise. But there is one key entry – the sum carried forward from the Profit and Loss Account. A negative figure illustrates that for that previous twelve months, the firm made a loss. Losses are not an issue so long as the firm has the reserves to support them. A loss from the P&L and a negative net worth tells the candidate that this is firm or partnership with problems.
- Likewise, if the losses year on year are rising. That suggests that the management team haven’t got control of the finances. It rings even louder bells since it questions why the firm is recruiting rather than getting a hold of its business and reducing the loss.
We could go on. But you get the drift. Your accounts need to reflect strength – such that a candidate for a job in your firm feels inclined to risk their future, and that of their family, with you. Irregularities ring alarm bells. Candidates are likely not to apply or to decline your invitations for interview if they sense something out of the ordinary.
So if you are going to expand through recruitment, or if generally you know you’re likely to recruit in the future, plan for it and make sure your accounts will not drive good candidates away.