The latest version of the board game Monopoly comes with contemporary streets and properties to buy, updated playing pieces and, wait for it, a chip and pin terminal. The game’s maker, Parker Brothers, is phasing out the cash-based version as it says it is adjusting to the new way business and finance works. Transactions are recorded on phoney Visa cards and an electronic cardreader keeps a running tally of players’
credit.

It’s a far cry from the days when players could transact with and see their piles of paper cash in front of them. But arguably the old-fashioned version, with its more visible flow of monies, offers businesses a clearer and more salient lesson in the importance of cashflow, particularly when set against the economic downturn.

According to the latest Business in Britain survey from Lloyds TSB Commercial, business confidence has hit a 16-year low. With falling orders and late payment, concern over cashflow is rife with the survey finding that 29% of firms are reporting difficulties in this area, up from 23% last July.

More than half of the 3,450 companies surveyed also expect profits to fall in the first six months of this year. This translates into yet more depressing reading for those in the recruitment sector, with the survey reporting that the balance of firms which plan to step up recruitment has dropped sharply from -9% last July to -25%.

While no-one can safeguard themselves totally against what might happen in the coming months, recruitment firms, like those in any sector, can at least help themselves by ensuring that they take appropriate steps to reduce the risk of finding themselves in serious financial trouble.

Cash is king

It might be something of a cliché but cash is the lifeblood of business and effective management of cashflow is essential to an organisation’s survival and prosperity. It’s feasible that your company is profitable but if you’re not paid in full and on time it could signal the beginning of the end for the business.

“Managing it sounds easy to do but in reality it is pretty difficult and it is where many firms fail,” says Nerys Roberts, commercial director of PayDynamics, which provides specialist back office services for recruitment agencies. “It’s what pays people to come to work and do the work but if you haven’t got it coming in it is critical.”

The important point to remember is that even though you can’t always control it, the responsibility for cashflow begins and ends with you, so make yourself aware of it.

Make it part of your management routine to produce regular cashflow projections. Having a precise understanding of what you owe, what you are owed and the cashflow highs and lows is imperative. Put together a 12-month projection of what your cashflow might look like on a simple spreadsheet document.

Companies like Hitachi Capital can provide a template but typically it should include salary and other payments to your business, outgoing monies including rent, rates and lease payments, costs and stock payments, interest on any loans and bank account balances for the beginning and end of each month.

Once you’ve analysed cashflow, investigate areas where you can make potential improvements. For instance, ask suppliers if they’d be willing to grant you discounts on prompt payment and find out how much you might save by switching suppliers such as utility providers and assess whether it is cheaper to lease equipment rather than buy it. Even the smallest of tweaks to your cashflow will start to add up.

Be selective when choosing clients
While no-one wants to turn down customers at the moment, you need to make sure that those people you do trade with are able to pay for your services and on time. Clearly, anyone labelled as high risk by the credit reference agencies should be avoided. But don’t take any new potential customers at face value. Conduct some research to find out the financial standing of their business and track record of paying.

“Choose your customers carefully,” says Alison Small, managing director of Venture Finance North. “There is a danger when you’re looking for turnover to accept customers easily but bad debt can eat into hard-earned profits.”

“The greatest tool you can use is knowledge of the probability of bad debt,” adds Ian Humphrey, managing director of Back Office Services, an outsourcing, administration and finance company specialising in the recruitment industry. “By using debt referencing agencies or bad debt protection cover, you can receive feedback from those types of organisations as to who in their view is creditworthy and to what extent they are
creditworthy.”

Also be alert to any organisation which wants to place a large piece of business with you and is asking for different payment terms. And while public sector work will be more reliable it is not without potential cashflow hazards. When putting together projections, plan in the effect on your cashflow of having to pay temporary staff up front.

Roberts says to bear in mind that if it’s a government contract you won’t see this payment for at least around 30 days. Margins may be higher for private work but this must be balanced with the increased payment risk factor and you’ll have to work harder in the first instance to assess their creditworthiness.

Watch your debtor days
Reducing the number of debtor days (the number of days it takes to collect payment on goods and services sold) is one way of improving your cashflow. If you’re waiting for a 30 days’ payment, chase the customer within 14 days to try to bring that payment in sooner.

“Try to be actively in touch with the company that you are trying to get the money from,” says Roberts, while Ed Winterton, regional managing director of Bibby Financial Services, adds that the better the relationship with the client, the more likely you will be paid on the terms you want. “You are more likely to be put to the top of the pile,” he says.

It is a good idea to give yourself targets to improve the number of debtor days and at the very least you should be monitoring them. You can apply a simple mathematical formula to assess the number of debtor days you have in a year by multiplying the number of debtors you have by 365 and dividing this by your sales revenue. Experts say that if the total comes to more than 40-50, it equals pressure on your cashflow.

Factoring
Factoring is another way to instantly improve your cashflow. You give your sales invoices to a factoring company, it pays you an advance, typically between 65-80% of the value of the invoice. You receive the remainder, minus the factoring company’s interest costs, once the invoice is paid.

Factoring can take different forms. With confidential factoring, the factoring company remains invisible to your customers and sets up a separate bank account for payments. It also takes on any chasing of the debt, assuming the role of your credit control department, using your name and brand in any dealings.

If you enter into a ‘recourse agreement’ with the factoring company, it will bear all the burden of collecting the money, while a nonrecourse agreement means you have to stand any bad debts which are charged back to you by the factoring company.

Winterton adds that a lot of sales staff don’t actually like asking for money. However, recruiters need robust systems in place that not only help them understand the creditworthiness of debtors from the outset, but also relieve them of the hassle of credit control and running back office systems.

“That’s where we can step in and take a lot of that from recruiters allowing them time to actually go out and find new avenues for the business,” says Winterton.

Jonathan Margrave, managing director at London-based agency JobGap, sums up the benefit of this kind of arrangement. “The pressure is on for all recruiters not just to win business but to get clients to pay for the business that they have used. So it was a huge relief for me not to have to unnecessarily worry about that,” he says.

Remember, factoring works well for a fastmoving business which needs to keep feeding itself with working capital, but isn’t necessarily the best option if turnover is decreasing. So in the current climate, think through the decision to use such a company carefully.

CASE STUDY: JOBGAP

Jonathan Margrave understands that cashflow is the lifeblood of any business and, having previously worked for major recruiters like Reed, Capita and Hays, knew the importance of having the right systems and facilities in place to help manage and control it.

When he set up JobGap in August last year, he wanted to ensure the business wouldn’t be hampered in what it could achieve because of cashflow. “Starting out on my own I had no ‘machine’ to rely on so literally had to find someone who could protect me that way,” he says.

So he decided to outsource the payroll and back office functions and looked for a supplier which could also fit in with his paperless vision, an inherent part of the company’s operation since launch thanks to a unique technological infrastructure. Clients book candidates online and a self-service system avoids the need for paper timesheets. Contracts are also completed online.

In his search he found PayDynamics, which offers a bespoke service especially designed for recruitment agencies and SMEs. Crucially, it had the technology to dovetail with JobGap’s paperfree approach. “I didn’t want to be bombarded with paper-based offerings where I had to confirm things in triplicate before any monies could be released to pay contractors or invoice clients,” says Margrave.

PayDynamics provides payroll to both JobGap’s temporary workforce and its own staff and the package of services also includes monthly management accounts, VAT and statutory returns and annual accounts and financial funding through a factoring arrangement. PayDynamics ays its average client is a recruitment agency with a £500,000 turnover and around 25 temps on their books. Payroll management services would cost only £6,500 per year and given the salary for a payroll manager can cost in excess of £40, the potential savings are clear.

Margrave says when setting up the company there were three factors that were key: making sure he had the right product for the market, that he was in the right market and that he “didn’t have to worry about the back-end”.

“In speaking with PayDynamics about the product and finding out how flexible it was, it was like manna from heaven, not having to worry about anything in that regard.”