What cashflow challenges do recruitment firms face?

Maintaining cashflow is a concern for any business. But when you’re running a busy recruitment company, managing cashflow and aged debt can be a very real and ongoing challenge.

With the combined hurdles of long payment terms, slow settlement of invoices and the ever-present need to pay your contractors, staying in control of your cash inflows and outflows can be difficult. So, it’s important to have a tight grip on your accounting and key financials.

We sat down with Matt Lawrence, Operations Director for SRG, the Science, Engineering, and Clinical recruitment specialists, to learn more about these cashflow challenges.

The challenge of paying your contractors

On the whole, most recruitment businesses will split their services into permanent placements and contract (or temporary) placements. Of these two, it’s the contract placements that generally produce the greater number of cashflow issues, as Matt explains:

“The challenge on the perm side is making sure you get your introductory fee paid promptly. At SRG we guarantee our placements for three months, meaning we replace them for free if either party terminates in that time, but this is dependent on having actually received the fee – if the client delays payment we may find ourselves replacing a candidate we were never paid for, which gets awkward. You need to get that money in the bank to cover your costs of re-working the vacancy or in some cases to cover a part rebate. If the client hasn’t paid yet, they probably never will, so the rebate is automatically 100%.”

“The bigger challenge for recruitment companies is contractors or temporary labour. At SRG we pay our contractors every week – that’s one of our unique selling points (USPs) and we think people really value this. We place into niche roles so we may be paying a contractor up to £2,000 pounds per week.”

“We’ll pay them two weeks money, that’s four grand, maybe three weeks, that’s six grand – and then the client owes us the money. If you have 10 contractors on site that’s £20k per week in costs, and on 30-day terms that amounts to £80k+ before seeing any payments in – and that’s terrible for cashflow.”

Long payment terms and getting paid

The longer your payment terms are, the longer the wait you’ll have before you see any income from the contractors you’re supplying to customers. So, as Matt highlights, your next challenge is to manage and negotiate the most favourable payment terms with clients:

“Clients are happy to sign your payment terms. But, even though they’ve signed to pay within 14 days, some clients don’t honor this. As a recruitment company, you’re nearly always classed as a supplier – and most clients will want to pay you on 30 days from date of invoice at best, and 30-60 days from end of month at worst, something smaller companies simply couldn’t bear the cost of and larger companies must factor into their negotiations.”

“Then the payment’s got to clear through the bank – that’s another seven days. So, you’re probably in for about 20 grand for each worker, if they’re paid on 30-days end of month terms.”

Aged debt, invoice financing and managing your queries

It’s easy to see how slow and late payments can start to have a serious impact on your cashflow position. With payments going out of the business on a weekly basis, and cash not coming in for, potentially, eight or nine weeks, getting a good grip on your aged debt is absolutely vital.

“We used to have a real issue with debtor days being way into the 60+ days on average but we’ve got that debtor day figure today down into the 40s by improving procedures and ensuring communication with clients is consistent and accurate. Bear in mind, we have agreements with some big clients to only charge them every 60 days. So, automatically, a lot of them will be above the aged debtor average.”

“The other part of your debt is your overdue monies. There’s always overdues in recruitment, mostly due to client queries. So a client may say, ‘Your contractor claimed 45 hours, but five of them are overtime because they were taken on a Saturday. So rebill us for 40 hours, plus five at time-and-a-half’. It’s common for expenses to hold up the process too. I have a regular query for around £8,000 typically held up because of a £20 expense claim for a taxi to another site which wasn’t signed off correctly, or the receipt was lost. If not picked up quickly this may miss the client’s next payment run, causing further delay”.

“When you re-bill, that money may not be due for 30 days from the new invoice date, or longer. So keeping the number of queries down is vital if you’re going to keep cash coming in.”

Many fast-growing firms, especially those with large corporate clients, may use invoice financing to counteract the effects of slow payers. Borrowing against money you’re owed has obvious cashflow benefits: money in the bank within 48 hours, rather than having to wait over a month.

That said, invoice financing isn’t something to be rushed into. Exiting a factoring agreement can be a delicate process after it’s become part of your company’s monthly rhythm, causing a significant drop in the cash coming in.

Using technology to ease the accounting workload

Staying in control of your cash position as a recruiter is a constant issue, especially when contractor placements form a large part of your business and revenue streams. But financial technology and software tools can go a long way to easing the workload.

By using a cloud-based accounting platform, integrated with a cashflow and credit control app, like Fluidly, you make it easier to manage your ongoing cash position.

With the right fintech tools you get:

  • A real-time view of your cash numbers
  • Forecasts of your future cashflow position
  • A better view of aged debt and late-paying clients
  • Automatic email chasing of late payments.

Getting tight control of recruitment cashflow

Keeping on top of your financials is a key driver of success for recruitment companies. And, as Matt from SRG was keen to stress, staying in control of cashflow is critical:

“The crux of the cashflow problem for recruiters is this: you can’t necessarily predict how reliable your clients are going to be, and what queries they’re going to unearth which delay them paying you. And you don’t really want to delay payments to your workers because if they quit, you don’t have a product. And if you don’t have a product then you don’t have a cashflow pipeline at all, because you have no revenue coming in.”

“So it’s about billing at the right time, for the right money and to the right entity, in order to keep your queries down so the client can honour the payment terms agreed. It’s also about understanding when a client is physically able to, and is committed to making a payment (run) – not just when you expect them to.”

As with many other financial challenges, cashflow is about accuracy, punctuality and critically, communication from both sides.

Good cashflow management in recruitment requires:

  • Keeping a close eye on the detail of your invoicing – so you minimise any errors, reduce the level of queries and get your bills out of the door in the most timely way.
  • Knowing your current and future cashflow position – by running regular cashflow statements and forecasts, to provide the most detailed possible cash information.
  • Being proactive with your credit control – so you have properly defined payment terms, agreed credit limits and chase your overdue payments as swiftly as possible.

With these foundations in place, you limit the cashflow worries (and workload) and can get on with the important job of running and growing your recruitment business