I would say the most dangerous trap most recruiters fall into when becoming self-employed for the first time is failing to manage cash flow. The adage you must not forget when you first set up is:-
This may seem obvious but when you’re employed you often have no connection to cash collection; you bill, someone else invoices it and you get your commission, easy. Also when you’re employed you will be taxed at source i.e. the money that goes into your bank account has had the tax taken out already so you have no connection to how tax works. Finally, you don’t see the bills coming in that run the recruitment business that employs you, never mind managing who gets paid and when. However, when you run your own business it’s a whole different ball game, not only do you have to manage cash collection and all the bills that come with being a business owner, but you have to get your head round and budget for the 3 different tax bills; VAT, personal tax and corporation tax (business tax). So it’s hardly surprising recruiters struggle with juggling generating cash i.e. billing with managing cash. It’s hard enough budgeting for regular bills but then add in the 3 tax bills that seem to punish success as well, it takes an iron will not to spend some of that cash in the business account on those long sought after trappings of success while you wait for these really big bills to drop through. Sorry if I’ve made this all sound a bit of a nightmare but a business that runs out of cash is just the same as a car with no fuel, its no use to anyone!
So now I’ve explained how much you have to take on in managing cash in your new business, now I’ll try and explain how best to manage it and do that cash flow forecast I promised.
Let’s put the 3 taxes to one side for a moment to allow you to go back to the sales forecast and add it to your costs forecast to see how they match up and show you how much cash you need for your new business. In your business accounts you have something called “debtor days”. This is the average amount of days it takes your clients to pay. It is also the number that allows you to add your sales and costs forecast together to get a cash flow forecast.
As you’re not trading now you won’t have a “debtor’s days” figure, so try to subtly find out how long on average your clients take to pay. This varies hugely from sector to sector so you do need to check. I have seen some industries where the main players take between 3 and 6 months to pay. Also if you can, try and judge how effective your current employer is at cash collection to see if this is the correct figure for you. I’ve helped one business with average debtor days of over 120 i.e. clients took an average of 4 months to pay which was simply down to not having someone in the business whose job it was to chase payments, once that was fixed it went down to 40 days!
There are a lot of techniques to improve cash collection in addition to chasing the invoices once they are overdue. One of the simplest and most effective is to discipline yourself (and your staff when you have them) to add into your rate negotiations that the preferential rate is based on payment being received within terms. Most of your client contacts don’t get involved too much on who gets paid when, so they often don’t care on the payment terms so will agree. You must then follow this up with an email confirming the lower rate you agreed but adding something along the lines of “this preferential rate is afforded to you on the basis that payment of all invoices are received within our payment terms. Should payment fall outside these terms we reserve the right to re-invoice you at the standard rate as per our terms”, and clearly you need to attach your terms of business to this email. Finally, also add the same words in bold to your invoice. This not only increases the speed invoices get paid without the need for chasing, but also gives you a consequence for late payment to give to the people in accounts so they are far more likely to pay attention to when you do chase i.e. the price going up if you don’t pay!
One of the positives on cash collection when you are in a recruitment start up is you will find your client contact is likely to be very helpful in getting you paid quickly. This is for a number of reasons, they now see the money as yours, they’ll want you to succeed and they’ll admire your courage. So don’t think those debt chasing calls will be daunting, they could even be an added accidental business generation call!
Another number you need for your sales forecast is the average number of days it takes for your placement to be invoiced. For most recruiters this is the day the candidate starts so involves average notice periods etc. However in some of my businesses I have successfully rolled out invoices to go out upon candidate offer and acceptance. The latter is clearly preferable but you do have to judge carefully how clients in your sector would accept this, unfortunately in a lot of sectors your clients won’t like it or it even accept it.
So if you now add together the average number of days it takes for you to send an invoice out after your deals done to your debtor days number, this will tell you how long it’ll take your sales forecast figure to turn into hard cash. To make my example easy let’s say on average it takes 30 days for your candidate to start, you invoice on the start date and your clients on average pay in 30 days, in total it would take 60 days for a placement to turn into money. Now if you copy your sales forecast row from your spreadsheet and paste it to the row below but move the columns 2 months along that’s your “cash in” forecast. So for example, the money your forecast in for January will land in your bank in March.
With your costs I advise for now you treat them as though you pay them all on time. This is for two reasons, one it keeps it simple and in line with your “wage” cost as you won’t want to wait 60 days to get paid, plus as a new business most suppliers will ask for all bills to be paid immediately if not up front. This will change once you get a trading history but be prepared for this when you first set up your business.
So finally to add this all together to get your cash flow forecast, subtract your monthly costs from your monthly cash in figure and you’ll have a mini profit or loss figure for each month as a result. If you then total these together month on month you’ll have a rolling profit/ loss figure which will then show you the maximum you’ll get into loss, and this is how much you will need to allow you to trade until the cash coming in catches up.
Adding the 3 taxes into the equation isn’t quite as simple and could make this blog very long and complicated so I’ll simplify it for now. Personal tax and corporation tax bills come annually, the timing of the second is set by you with the Inland Revenue, for example December every year or April. With both of these the end figure needs to be calculated by your accountant, but if you ask them for guidance on how to budget for them that’s the safest way I can answer it for now. With my partners businesses I update them on how much the running total is every month and when they are due, but I have a very good accountant! Your VAT bill comes once a quarter. Ask your accountant to set you up on Cash Accounting, which means you pay VAT on the money that lands not what you invoice, this will positively affect your cash flow as you only pay VAT once your invoices are paid. Again we advise our partner businesses each month on the running total for VAT and when its due, but you can do a rough figure yourself by using 20% of the cash that has landed that quarter as a guide, that figure will go down once any vatable invoices are deducted but it’ll keep you safe from a nasty surprise!
I suspect this is the least interesting of my blogs so far on how to write a recruitment business plan, but that’s why it is the most important to take in. Lets face it, to good recruiters cash flow and accounts are dull and even a bit scary. So for these reasons get help on your cash management until you know what you’re doing. Perversely I’ve actually grown to enjoy accounts and cash management by learning how to make them work for you and not you work for them, but it did take a lot of time plus one or two scares to really make me respect them!
I hope you’ve found this blog helpful and if you have any more questions on setting up your own recruitment business feel free to contact me direct or simply connect with me via Linkedin.
Written by Rhys Jones Managing Director – Davidson Gray.
Rhys sold out of his previous recruitment businesses in 2012 to focus solely on helping recruiters set up and build recruitment businesses. Follow Rhys on LinkedIn or contact him direct for help with your start-up recruitment business or for coaching to grow an existing one.