Every business will experience cash flow problems at some point, but for recruitment agencies, it can be especially devastating.
This is because their income relies on payments from clients that can often be delayed and a significant proportion of the agency’s costs are personnel.
In this blog post, we will discuss the main reasons for cash flow problems for recruitment agencies and give them the best tips on how they can protect and improve their cash flow.
Reasons for cash flow problems in the recruitment industry
There is a range of issues that can impact cash flow that is specific to the recruitment industry. These include:
Delayed payments from clients: This is the most common reason for cash flow problems in recruitment agencies. Payments from clients can often be delayed, especially if the client is a large organisation. The payment process may take a long time to complete due to their internal processes or they might not be able to make the payment on time because they are experiencing cash flow problems themselves.
Problems with invoices: Billing errors such as incorrect details, missing documents and missed deadlines can cause delays in payments from clients and negatively affect your cash flow.
Lack of digitalisation: Digitalisation has become a norm in the recruitment industry and many recruiters are now looking to deploy specialised software that can help them streamline their workflows. However, not all agencies have taken steps towards digitalising their processes or finding smart solutions for managing billing and payments effectively. This makes it more difficult to manage and process invoices, leading to delays in payments.
Poor payment terms: If you fail to set clear payment terms with your clients right from the start of a contract, it may be harder for you to hold them accountable if they do not pay on time or if there are any other issues that affect their payments.
Lack of control over financial operations: Many recruitment firms do not have clear visibility into their cash flow and therefore, are unable to make any sound business decisions. Without the right software in place or systems for tracking data, it may be difficult for recruiters to monitor expenses and other key metrics that impact their financial performance. This makes it harder to react quickly to any potential problems and limits their ability to make changes that could improve their cash flow.
Unpaid invoices: This is a common issue for recruitment firms as clients often take longer than expected to pay their bills. In some cases, agencies may have to wait up to 90 days for payment which can severely impact their cash flow. There are a few ways to reduce the risk of this happening including implementing a good credit control system, requesting deposits from clients and chasing payments regularly.
Poor debtor management: If agencies do not chase payments regularly, it can lead to large debts building up over time. This will impact the cash flow as the agency will need to set aside money to cover these bad debts. It is important to have a debt collection policy in place and to chase payments regularly.
Realistically, the main reason for cash flow issues in the recruitment industry is that they are reliant on clients for payment. As a result, if clients do not pay their invoices on time then this can have a big impact on the agency's cash flow.
Luckily, there are a few ways that agencies can protect their cash flow and improve their chances of making a profit.
How recruitment agencies can protect and improve their cash flow
1. Credit check your potential/new clients
Credit checking is a process that agencies can use to assess the financial stability of their clients. This will help you to determine whether or not a client is likely to be able to pay their invoices on time.
Conducting a credit check as part of the onboarding process can help to protect your cash flow, as you can refuse to work with clients who are deemed too risky.
However, credit checking should also be carried out on a regular basis to track changes in clients’ financial statuses.
If a client is considered too risky to work with, it can be better for your agency to walk away from the opportunity than take the risk and potentially lose thousands of pounds worth of unpaid invoices.
Not only will this save you time and money in the long run, but it will also allow you to focus on working with clients with better credit scores who are more likely to pay.
2. Send your terms and conditions with every CV
Adding your terms and conditions to every CV that you send out is a great way to protect your cash flow.
This will ensure that all candidates are aware of the payment terms and what will happen if they decide to withdraw from the process.
It also allows you to state clearly which services are included in the fee and which are not. By doing this, you can make sure that you are not providing services outside of the contract and therefore avoid any disputes over-invoicing at a later date.
At first, this may seem like more work for your recruitment team, but getting into the habit of doing so can save time and money in the long run.
Not only will it ensure that all candidates are clear on the payment process, but it will also help to protect your cash flow and maintain a positive relationship with your clients.
3. Offer favourable rates to prompt paying clients
We've spoken about how offering every customer favourable rates to all customers can be damaging to your cash flow, but offering this to prompt clients can actually help.
If you're struggling with a specific client and are worried about getting paid on time, offering them a discount or credit terms may encourage them to pay their invoices promptly in the future.
On top of that, it will also strengthen your relationship with that client, which could lead to them using your services more in the future.
In order to implement this strategy, you need to be able to track the payment behaviour of each client, which is why it's essential to use specialist credit control software that can help you with this.
4. Automate your accounts receivable process
Using automation software can help to significantly speed up your accounts receivable process by carrying out tasks that would normally require manual input. One example of this is invoice reminders, which can be automatically sent at regular intervals if the invoice hasn't been paid yet.
On top of removing time-consuming manual processes from your workload, automation software also makes it more likely that you will be paid on time as it reduces the amount of human error in your credit control process.
Automation software is also a lot more cost-effective than hiring a full-time employee to manage your accounts receivable process - especially if you're only handling a small number of invoices each month.
Using Chaser's credit control automation software can help you to get paid faster and remove time-consuming admin tasks from your workload. Chaser's automated system allows you to reap the benefits of:
- Faster payment times as we chase your debts for you
- Reduced human error, meaning fewer mistakes and less chasing required
- Increased efficiency - all credit control tasks are completed in one place
- More accurate and detailed reporting: Keep tabs on the success of your credit control policies using our reports
To find out more about how Chaser's automation software can improve your recruitment agency's cash flow, start your free trial today!
5. Don’t let late payments turn into bad debt
Most small businesses simply write off bad debt as a cost of doing business. But this can be damaging to your cash flow and profitability in the long run.
Instead, take steps to collect overdue payments as quickly as possible. Using a debt collection agency or even legal action can sometimes be necessary. However, most companies are wary of using traditional debt collectors because of the negative reputation they have.
6. Offer your customers the widest range of payment options
When it comes to getting paid, the more options you offer your customers, the better. While bank transfer is still the most popular way of paying for your customers, making payments via credit and debit cards and PayPal are becoming increasingly popular.
So, by facilitating these payment methods, and by making it as easy as possible for your customers to pay their invoices, you increase your chances of prompt payments. Chaser's Payment Portals make it easy for you to offer your customers a range of payment options, including credit and debit cards, e-wallets and direct bank payments.
7. Get organized
One of the best ways to keep track of who owes you money and when they are due to pay is to use a tool that allows you to get full visibility over your accounts receivables. Managing and updating spreadsheets can be quite time-consuming and it's easier for human errors to occur. Thus, we recommend that you find a tool or software, such as Chaser, that provides you with full visibility of your overdue invoices, previous email exchanges and notes you or your colleagues have made in the past. This way, you will ensure that all invoices are followed up with and that you are completely in the loop of any payment arrangements made, or expected payment dates.
Protecting your cash flow
When it comes to cash flow problems, prevention is always better than cure. By following the tips mentioned in this blog post, recruitment agencies can protect their cash flow and improve their business' financial standing.
