1. Improve your short-term money management.
In most circumstances, short-term cash flows for recruitment businesses are straightforward and predictable. As a result, a short-term cash flow projection may be a reliable and helpful tool for assuring adequate headroom or providing early warning of impending financial strain.
A 13-week weekly prediction is usually required for effective short-term cash flow management. Invoice discounting facilities should be adequately simulated considering excluded sales and facility constraints. The prediction should be revised weekly to ensure all revenues and payments are captured and the beginning bank balance correctly entered.
Although this is misleading, "uncertainty" is sometimes used as a reason for not predicting in the medium term. Scenario planning and sensitivity analysis can assist management in preparing for a wide range of possibilities and providing appropriate headroom. For example, take a look at the following:
- New client accounts require funds;
- the ramifications of losing key clients;
- seasonal financial restrictions
- Current facilities are being strained as a result of growth.
2. Recognise and control critical success factors.
Avoid the temptation to concentrate on current sales figures. Instead, consider indicators such as pipeline, conversion rate, and trends in major client accounts. The depth and quality of client contacts, focusing on customer feedback and complaints, are more significant qualitative factors to monitor regularly.
Profit margin management is critical in an inflationary environment. It's also difficult in a highly competitive industry like recruitment. Avoid focusing your efforts and resources on industries with more mass-market supply and low switching costs. Long-term customer relationships based on reliable service and a consistent supply of employees across many business centres/departments will help you keep and increase profitability.
Manage your overheads carefully and act as soon as obvious danger areas are identified. Consider the full breadth of the proposed cost-cutting measures.
Ensure management accounts are created and reviewed on time, preferably within two to three weeks after the month's end. Results should be tracked against budget, and corrective action should be done as soon as underperformance or a change is recognised.
3. Understand and correctly balance your stakeholders' expectations and priorities.
Consider what information you may disclose to your stakeholders in light of commercial sensitivity. Information may reduce stakeholder worries but must be robust, internally consistent, and avoid generating new ones.
- Lenders - Maintain open and regular communication with your current lender. Not only does it promote trust and confidence, but giving early estimations or highlighting significant new customer wins or losses can help ensure that funding constraints or parameters will match your company's future expectations. Is your lender the best fit for these specifications? Other facilities or rates that are less conservative may be available.
- HMRC - When extra time is needed for VAT or other tax duties, HMRC will likely grant a structured proposal backed by credible estimations. However, you must stick to a payment schedule once you've agreed. HMRC may aggressively pursue missed payments, rendering the agreement null and unenforceable and resulting in collection action, including using winding-up petitions.
- Suppliers - Consider your critical suppliers, possible continuity difficulties, and how these suppliers see your creditworthiness and constraints. Then, take the appropriate steps to contact credit insurers or rating agencies and try to improve your credit limits by providing up-to-date information.
- Customers - can also use credit rating agencies to assess continuity risks in competitive tendering situations. On the other hand, credit ratings are frequently based on relatively little information available in the public domain. Working with referring organisations might thus help you improve your score.
- Shareholders - Engaging in challenging talks with shareholders may be necessary to choose medium-term stability above short-term payments. Lenders and HMRC are less likely to be sympathetic if excessive gains have been extracted. As a result, ensuring that dividends are appropriate in the medium term, supported by good forecasts, and related to profitability rather than solely dependent on short-term cash availability.
4. Consider client concentration and proactively manage bad debt risk.
Customer accounts in the recruiting sector may grow swiftly. However, relative importance can also alter if other client accounts decline in size or seasonal factors expose a recruiting firm, however momentarily, to a specific customer.
Invoice discounters frequently limit funding 20% to 30% of the ledger against specific clients for a good cause. The failure of a significant customer has an immediate financial impact owing to bad debt and a long-term P&L impact due to missed future revenues. As a result, failing to notice increased concentration may lead to the omission of a financing gap.
Communicate often with your key clientele to better grasp their future requirements. Try targeting sales efforts and resources towards a diversified client base to decrease the risk of concentration. Ideally, this involves limiting exposure to a particular industry and decreasing the risk of disputes, contract loss, seasonal financial pressure, or customer failure.
Ensure you have a good system for negotiating credit limits with customers. Examine your company's bad debt risk regularly, and verify good credit control, with straightforward remedies in place if debtor days are drifting on accounts. Consider using credit insurance or credit score firms to protect yourself from poor debt danger.
5. Ascertain that your finance function is fit for purpose.
Your finance department must be purpose-driven from the top down. Smaller recruitment businesses may find it more challenging to have a balanced skill set at the board level.
Examine your employees, technology, and processes to ensure they are all up to the task. Your systems can quickly become old (or outdated). Prompt and accurate invoicing is critical to avoid tying up your working capital, which can occur when invoices are late, lack proof, or are incorrect.
The finance team's key areas of focus are as follows:
- Development of credible MI and financial estimates for the near and medium term; strategic advice to the board
- important players, such as lenders
- financial control, including efficient sales invoicing and credit control; and
- Payroll management.
Seek advice on your financial procedures, and consider outsourcing sections that are too small or expensive to manage. It may be more cost-effective and efficient than performing these tasks wrong.