This comes as no surprise, given the flow of negative news regarding their listed counterparts who are finding the market equally tough.

These were the sentiments of Paul Venables, Hays’ finance director, who stated that he expects to see 20% of companies in the sector disappearing over the next two years. This would seem to be a dramatic reduction in the industry, but it is worth putting this into context. The
industry has over 19,000 companies so a loss of around 3,800 competitors might be welcomed by those remaining. However, of these 19,000 plus companies, only 3,700 have revenues of over £1m, according to the Office of National Statistics. The loss of 20% of these recruitment companies would, therefore, not have a dramatic effect on the industry.

Against this background, both temporary and permanent billings continue to fall in value, with permanent billings in February 2009 nearly 60% down compared to the same period last year. So how do recruiters ensure that they do not become a victim of the one in five expected to disappear?

Christopher Clark, corporate finance partner at BDO Stoy Hayward, told Recruiter: “While it is difficult to influence your marketplace in a bull market, this may now be the opportunity to have those client interactions you never got round to when it was easy to place people. While it is
inevitable that there will be casualties from the current economic uncertainties, there will also be the formation of new businesses, new business models and the emergence of the strongest players in the market.”

What businesses need to consider is how to build a stronger platform and, most importantly but often overlooked, how to finance the business during a period of growth. This can see fundamentally good businesses run out of the cash needed to fund growth, as the gap between profits
and cash received is too long and ‘stretching’ creditors is not an option when the two largest of these are your employees and contractors.

Understanding your business’s working capital requirements is paramount, so that growth can be controlled within the funding available and flexible enough not to inhibit the business. Invoice discounting is widespread across the recruitment sector and is a flexible way to finance a growing contractor base. The fundamentals of using this to fund expansion are relatively easy:

1. Even at a lend rate of 80% of invoice value, equity of 20% is still required
2. Using working capital facilities for non-working capital purposes (for example, funding start-up losses for people and new premises) is inherently risky and fundamentally an equity risk that should be funded as such.

Keeping tight control of working capital will determine the level of equity required in the business. At a long-term average of 42.5 days of sales being locked up in debtors, a business turning over £1m annually would require £120,000 of working capital before taking account of any start-up expenditure. Increases in debtor days to more than 47 days, as shown over the last two years in the graph above, increases funding by more than 10%, with typically only 80% of this able to be funded from invoice discounting facilities. Part of the business plan needs to ensure that adequate facilities are in place to meet all theserequirements.

Clark said: “I am seeing a number of opportunities at the moment where recruiters have not had sufficient headroom in their facilities to cope with fluctuation in working capital and adjusting operations to the current environment. This largely comes down to facilities being used to
fund acquisition/expansion activities and secondly, not reacting quickly enough to changes in circumstances to adjust their cost bases accordingly. Both of these are not necessarily an issue if the business has been given sufficient equity funding at the outset, but few rarely are.”