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The UK recruitment industry is worth a massive £28.7 billion in annual economic value, with about 91% of this figure coming from placement of contract or temporary workers. Yet, according to comprehensive research, about 38% of recruiters experience cashflow problems as their main challenge when carrying out their day to day activities.
Why is this such a big problem for recruitment agencies? Well, consider the average funding cycle for a recruitment company.
On the first day, they place a contract worker in a firm. The contract worker will complete a week's work and submit a time sheet which the agency uses to raise an invoice for the firm (employer) to pay for services rendered. However, the payment period may take 30 days or more. This may affect the financial ability of the recruitment agency to pay the worker on time.
Consequently, if the employer is a habitual late payer, this will worsen the situation. Additionally, recruitment agencies need to consider the nature of the industry. If they are placing workers in a seasonal sector, they must beware of overheads they have to accommodate during the off-peak seasons.
For this reason, many agencies resort to sourcing funds from a finance facility. This is a good decision, but not one without its risks. It is therefore important to weigh up the options and decide if a finance facility will hurt or improve conditions. To do this ask these three critical questions:
1. What does a finance facility really cost?
Note that many low service charge financiers may not present all the details of their offers at a glance, so ascertain what the deal is before signing the dotted lines. Before continuing, find out:
- Is the amount the business can withdraw against invoices limited? If so, why and how will it affect the cashflow needed to scale the business the business?
- Does it put restrictions on the amount the business can be funded through a single client, despite them being the highest-paying client?
- Does the business need to pay a renewal fee to extend the contract?
Does the business have to pay extra fee's to increase the amount recruitment finance [1] ?
2. What can be improved?
Consider all the difficulties and challenges experienced with the current financier, could the business get better services elsewhere? If the business advanced a significant amount of profit, what would be the first things to improve? The answer to this can take the agency from a mediocre-performing one to a highly-successful company.
3. Is there a better opportunity elsewhere?
Sometimes agencies attach themselves to a particular financier for too long, they forget they can actually explore other options. Consider more cost-effective alternatives, better rates and more-feasible conditions. Even if it means paying a penalty to break away, it might benefit the business more in the long run.
Recruitment agencies need to be flexible in their relationships and choose a financier that is best suited to their mode of operations. This will go a long way in building a resilient balance sheet for the company.