Why recruiters struggle with cashflow – and how to tackle the problem

Tracy Ewen

Tracy Ewen explores the three main reasons that the recruitment sector is so susceptible to cashflow problems, and the steps recruitment firms can take to make sure their finances remain healthy.

Recruitment firms should view the post-downturn months as some of the most dangerous they will face. As confidence in the economy struggles to catch-up to growth, the jobs market is often among the last parts of the economy to recover, leaving healthy firms facing cash shortages that can hold them back from enjoying the spoils of the uplift.

Customer diversity: Most recruitment firms have a wide array of clients, varying in size, industry positioning and business type. Some of these companies will only engage in recruitment activity sporadically and few will have a regular, reliable, long term relationship with a single resourcing partner. The combination of these factors makes the payments landscape very unpredictable, impeding a company’s ability to plan ahead.

Probation periods: Commonly, firms allow a window of a few months for the employee to settle in and prove their worth before taking payment for the service. This means companies must wait up to three months before they can even issue an invoice. Following quiet periods, such as the end of an economic downturn, this delay can leave those companies short of cash for a long time after sales pick up.

Inflexibility of outgoings: While the delay between work completed and money in the bank is inherently very long in the industry, it gets no special dispensation in terms of its PAYE and VAT requirements. These inflexible deadlines can result in cashflow issues and are made worse by positive spells of business growth which can generate large bills before payments arrive.

It’s not easy for recruiters to manage cashflow at the best of times, but the current economic climate will exaggerate many of these problems. Here are four tips for getting on top of cashflow concerns:

1. Don’t always associate higher sales with better cashflow. If large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash.

2. Plan, plan, plan! Prepare cashflow projections for next year, next quarter and, if you’re on shaky ground, next week. The key to managing cashflow is to be aware of any problems as early and as accurately as possible. Financial services providers are wary of borrowers who suddenly need to have money today.

3. Finance problems can often be self-inflicted. It seems obvious, but recruitment companies which send out incorrect invoices often find that their customers end up returning an invoice and requesting a new one, causing even greater delays.

4. Find a solution that fits your specific needs. If you’re being held back by the gap between accounts receivable and money in the bank, there are finance solutions that can turn one into the other, cutting out the wait.

As recruitment businesses are able to nurture the green shoots of recovery and grow in line with the wider economy, it’s important to remember the dangers that lurk in this seemingly positive transition period.

Traditionally insolvencies tend to rise following economies’ emergence from years of recession and it is always a shame to see otherwise healthy businesses brought down by cashflow shortfalls.

Tracy Ewen is managing director of invoice finance specialist IGF.