Cash flow challenges when starting up a recruitment agency
Cash flow can be a matter of life or death for a business. Whilst you’re an experienced recruiter with extensive success in developing business, it means nothing unless you have the money in your business account to invest in your success. So, what are the most common cash flow challenges you face when starting your own recruitment businesses, and how can you overcome them?
What exactly is cash flow?
When you look at a company’s bank statement, you quickly realise that cash flow is a dynamic and often unexpected component of corporate life.
Money is continuously moving in business…
- Cash flow in: when clients pay for their services when the bank makes a loan, pays interest or sells assets.
- Cash flow out: Paying suppliers, employee wages and paying interest.
- Net cash flow is the difference between cash inflows and outflows for a certain period (week, month, etc.).
The challenge for every business (especially a start-up) is to guarantee your net cash flow in managed to avoid running out of money.
Inability to Understand Cash Flow
It’s amazing how many start-ups fail to recognise the importance of cash flow. Understanding your cash flow doesn’t end after your recruitment business is up and running and has survived the early sales’ ramp up’ stage. You must certainly watch your cash flow as you develop and add personnel and your breakeven operational expenses increase. This may be daunting, but calculate the average operating expenses over the previous three months if you want to keep it easy. Then maintain at least one month’s running costs in the bank, or two months if you’re risk-averse.
Start-up Costs Underestimated
If you’re starting a business, creating a realistic budget (with some wiggle space) is critical to avoiding cash flow concerns straight away. You’ll begin out on the wrong foot if you make unrealistic projections and don’t have a financial reserve.
Overestimating the speed of profits
When you first open your doors, you undoubtedly expect a line of clients ready to use your services. However, this may not be the case for your business.
According to research from Yell Company’s ‘Take The Leap’ survey, 79% of small business owners said they generated a profit in their first year. Another 27% of small business entrepreneurs reach profitability within the first one or two months.
In contrast, the typical entrepreneur takes nine months to start their business and generate a profit. Building a profitable business takes time, and roughly one-third of businesses do not achieve that goal in the first year.
If you’re not prepared, this might lead to early cash flow problems. Setting a realistic time frame for profitability and having enough cash on hand to get you there might help you avoid stressing about cash flow.
Failure to Prepare a Cash Flow Budget
A cash flow budget estimates the cash you anticipate to receive and the cash you intend to pay over a specific period. This is often referred to as a cash flow forecast. For example, if you want to make a cash flow budget for the next 30 days, estimate how much money you’ll receive and spend in that time frame.
In the day-to-day operation of your business, this budget might be more valuable than a regular budget since it will help you keep track of your financial situation at all times.
Will you be able to cover your expenses? When do you anticipate receiving the majority of your outstanding invoices? A cash flow budget can assist you in answering these questions and addressing problems before they become major difficulties.
High Overhead Costs Are Being Ignored
Your small business will have cash flow concerns if your overhead costs are too high. High rental rates, costly vehicle leases, and travel may quickly eat into your profits. You’re fighting an uphill battle when your overhead expenditures are significant. You have to create more business to cover your overhead costs and break even.
Reducing overhead costs can have a long-term impact on your company’s profitability and cash flow.
Collecting Invoices Too Slowly
You may be generating many invoices, but you may find yourself in a difficult situation if your clients are late paying you. Slowly collecting debts may hinder growth and prevent you from getting the funds you need to keep your company moving ahead. Furthermore, cash flow issues caused by delinquent debts might make it difficult to pay your workers on time.
Putting in place a collections strategy and only offering credit to clients who have a track record of making quick and on-time payments will help you prevent cash flow challenges caused by debtors.
Growing Too Fast
Most individuals desire to expand their business, but doing so too rapidly can lead to cash flow concerns, detrimental to the company.
Assume you’ve landed a significant client contract that exceeds your company’s present capabilities. As a result, you’ll need additional workers to keep up with your client’s requirements.
However, because you haven’t received your first payment from the new client, you won’t be able to pay the workers. So you’ll be in a negative cash flow situation until the client pays, which could take over 60+ days.
You will have to ensure you have the funds to cover this eventuality. Either through self-funding, credit from a lender or a bank loan
Your profit margin is Low.
Pricing is an art form, but it all begins with understanding your statistics. When assessing pricing, knowing your profit margin is critical. Your profit margin indicates how much money your business makes out of its earnings.
A low-profit margin shows that your costs are excessively high, your pricing is excessively low, or both. You’ll always have cash flow problems if you don’t have a significant and consistent profit margin. Reviewing and analysing your profit margin over time may provide insight into your pricing and cost data, allowing you to identify changes to improve your cash flow.
Calculate your gross profit margin with our margin calculator here
Tax Bills Aren’t Planned.
When working as a recruitment consultant for a company, your wages were subject to PAYE (pay as you earn tax). Your employer took care of your tax and national insurance each month, leaving you with your take-home pay each month and no hassle of handling tax and NI yourself. However, when you operate your own business, you must account for several different taxes commercially and personally. The ones you’ll most likely need to be concerned with as a small business owner are listed below.
- Payroll taxes are paid monthly. These are charged if you use a PAYE system to employ someone or yourself.
- Income tax is levied on any personal income not paid through a PAYE programme. This includes any dividends you may get if you are a Limited Company. Your Self Assessment return calculates the amount of Income Tax you owe.
- National Insurance pays for government services as well as your state pension. You pay it yourself through Self Assessment, and businesses contribute on behalf of their employees.
- VAT is an indirect tax. Most purchases and transactions will include VAT, depending on the products and services purchased and sold. VAT registration is required for businesses with a taxable turnover of more than £85,000 per year; you can register voluntarily if your taxable turnover is less than £85,000. VAT, unlike other taxes, is often paid quarterly.
- Profits from limited corporations, limited partnerships, and limited liability partnerships are subject to Corporation Tax (LLP).
The answer is Simplicity.
Simplicity has provided market-leading recruitment finance and back-office solutions to start-up and growing recruitment businesses for over 17 years. We only work in the recruitment industry, which means we understand the challenges you face and how to overcome them. Whether you are looking for a temporary or permanent solution, we have the funding, team, and technology to get you started and support the growth of your business.
Our Finance Solution offers recruitment businesses 100% cash upfront as standard on temporary workers and permanent placements. As a result, rather than waiting over 30 days for clients to pay, we’ll pay your workers and release your profit margin within days of raising your invoices.
Solving your cash flow concerns and your ability to fund is essential. So you can spend more time pursuing new business and other fee-generating activities instead of chasing payments.
Keep it simple. Get in Touch 01594888518 or email sales@simplicityinbusiness.com
Read our blog on how to boost your cash flow here