Waiting for the payoff: 'We've always got temporary cashflow problems'

As a recruitment agency expands, how can it stop its income having to play catch-up with its outgoings?

For Chris and Louise Davies, who have been running a recruitment agency in Malton, North Yorkshire, for just over a year, the situation has been further complicated by their own ambitions. "So far, we have been dealing with placing people in permanent positions, but we'd now like to expand into the temp market," explains Mr Davies.

In fact, they employ one temp already. "We can cover that one fairly easily because it's only £6 an hour for 35 hours a week, and it's with a very good client who always pays us on time," he says.

"But if we had 10 temps, they'd all work next week, send their timesheets in on Friday and quite rightly expect us to process the payroll to pay them the following Friday," he adds. "By that time, we wouldn't have received the money from the clients, so we'd always be playing catch-up.

"So you either need to have a lot of capital in the bank to cover yourself, which we don't, or you look around for other options. We want to know what those are and which is the best one."

So far, they have looked at factoring, where sales invoices are sold to a third party at a discount. "It may be that is the best path for us to take," says Mr Davies. "On the other hand, there may be other avenues that we are not aware of."

Currently, the company depends on its bank overdraft. "However, if we went down the temp route, we'd have to increase our overdraft at least 10 times, which would be an enormous amount of money."

Davies Recruitment covers the North Yorkshire and East Yorkshire area, supplying staff at all levels from junior to middle management to executives. It recruits people for areas including accounts, banking, administration, customer service, marketing and sales.

The company is going from strength to strength, and the next step is to expand from a single office to a network of branches.

"We think that moving into the temp market will help because it generates revenue very quickly," says Mr Davies. "In addition, we want to keep providing an excellent service in permanent recruitment.

"But as it is, we sometimes have to call people up to remind them they owe us an outstanding invoice - only to be told they can't pay until the end of the month. It would be nice not to have to be concerned about being in that situation."

WHAT THE EXPERTS SAY

John Brooks: Head of Business Banking, Abbey

"Factoring or invoice discounting could help here, as an overdraft facility may lack the flexibility to bridge the cashflow gap.

"Invoices supported by signed timesheets will usually allow the factor to advance 90 per cent of the amounts owing within 24 hours. A factor will also manage your sales ledger fully and provide credit control.

"Invoice discounting is similar to factoring except the sales ledger stays with you and the service is not disclosed to your customers.

"Remember, a factor is a key point of contact with your customers, so look for one with experience in this sector and ask for references. Only go with a reputable firm that is a member of the Factors and Discounters Association.

"To aid cashflow, the business could also look to negotiate accelerated payments with its customers by offering a discount. And it could seek an annual retainer, paid monthly, if it is placing people regularly with a particular client."

Denise Walker, Executive Director, The Recruitment Industry Taskforce for Enterprise

"There is a lot more to temporary recruitment than people realise when they start out. Mr and Mrs Davies will need to compile new terms of business for their clients and contracts for their temps, as well as deal with the additional administration, to accommodate Working Time regulations.

"I would strongly recommend they write a business plan, which includes a case for the expansion. A template for this is available at www.rite.uk.com.

"They are right to be concerned about finance: 70 per cent of business failures are due to poor cashflow.

"It is imperative to discuss payment terms with clients upfront. It is usually a case of managing expectations, setting the boundaries from the start and sticking to them - and not being afraid to walk away from bad business.

"Mr and Mrs Davies must decide between dealing with the payroll and finance personally or using alternatives, such as invoice discounting, factoring, full financial outsourcing, or investment by business angels or venture capitalists.

"Each of these must be fully assessed before making the commitment. The wrong decision can prove painful and costly."

Hugh Fell: Head of Cashfriday, the recruitment specialist for Lloyds TSB Commercial Finance

"As Mr and Mrs Davies have identified, their business will need more working capital as soon as it expands its temporary activities. I believe they should also consider the cost of administering a fast-changing weekly payroll and the potential impact this could have on their own time.

"Factoring is a good option. This kind of funding facility grows in line with billings and therefore has substantial advantages over conventional overdrafts, as well as avoiding the loss of control associated with taking on another partner.

"Outsourcing the payroll, billing and credit-control functions to a specialist provider will enable the couple to minimise back-office costs. For a one-stop-shop approach, companies like ours offer a service combining invoice finance with an outsourced back-office function covering the entire process from timesheet to cash plus credit insurance."