I deal with a large number of recruitment companies who often experience cash flow issues. Many of these are doing everything right - they are measuring their Key Performance Indicators on a regular basis with the help of their digital accounts system (Xero) - however, now and again a cashflow issue is still lurking on the horizon. The most common causes are: expanding the business and employing more consultants, more contractors being invoiced, clients taking longer to pay than normal or large payments going out at once e.g. rent, VAT and corporation tax. Here is my cashflow advice for recruitment agencies.
To tackle potential shortfalls in cash, I insist that all of my recruitment companies put together some form of forecast or budgeting spreadsheet. By having real time and up-to-date financial information it has become easier to put together these forecasts and be aware of potential cash flow issues before they happen. Gone are the days when clients come to me at the end of the VAT quarter unable to pay the liability. They now know what the problem is, when it is going to happen and can then take the necessary actions to ensure the impact on the business is mitigated.
So what should you do if cash is required to either grow the business or deal with a short term problem?
Tip 1 - Ensure you are either factoring or invoice discounting to the maximum available. If you are stuck on 80% then you should speak to your provider and renegotiate your terms as it’s not uncommon to obtain 90% funding. If you are not using a factoring company, could this solve your initial problem and immediately release cash into your business?
Tip 2 - Review your costs to the factoring company. The market is very competitive and funders are fighting to win your business. You should review the contract on an annual basis and consider new funders like Market Invoice, who do not tie you in to contracts and allow you to pick and choose the customers you want to finance.
Tip 3 – Consider charging statutory interest on those invoices that are being paid beyond your credit terms. This is also becoming quite common now and I’ve seen agencies charge 8.5% interest on invoices if they are not paid on time. If you did not want to do it immediately you could inform all your customers that you will charge interest if they do not pay within the agreed credit terms. It’s amazing how quickly clients pay you when they know they will incur interest. The secret is to enforce the rule if they don’t pay on time otherwise they know you will not enforce it.
Tip 4 – Ensure your credit control system is strong and working efficiently. New technology now makes it easier to chase up slow paying customers. Have you looked at using Chaser as a means of sending automatic, bespoke emails to customers on a regular basis, without you having to think about it?
Tip 5 – Ask your customers to pay faster. Have you considered the impact on your cashflow if you offered a 2% discount if your client paid you within 7 days? Could this be something you could do?
Tip 6 – Request more favourable credit terms with your suppliers. If you don’t ask you don’t get… So, why not ask a supplier if they could extend your payment terms from 30 days to say 45 days? Those extra 15 days could make a huge difference to your short-term position.
Given these strategies, consider which make the most sense for your business. Working capital is the fuel that powers small businesses so it should be treated as importantly as winning new business and looking after your consultants. Without sufficient cash flow you will not have a business.
For further advice on forecasting, budgeting and general cash flow advice for recruitment agencies, contact me at email@example.com.