Cashflow is the life blood of any business and managing cashflow risk is something that should be high on your agenda. All too often you hear people talking about their sales …”we’re a $20 million dollar company” type comments and less often will you ever hear how much money they have in the bank.
This is potentially a bit weird as unless you can convert a sale in to a profit that you actually get paid for then your business future is likely to be challenging. Some of the things that you can do that will have a direct influence on Cashflow are;
Terms of Business & Credit Process
Having a good structure around your terms of business – eg the payment terms and the way that you decide to offer credit (or not) will have a significant impact on how much cash you have in the bank.
It is good to ensure that you have solid reasons for extending payment terms beyond your normal payment terms and understand the additional cost that you are likely to incur (ie interest expense) by increasing payment terms. It is also worth using a third party credit checking service to provide information so that you can make a decision to offer credit (or not).
Probably the most important thing to do once you have agreed to trade with a client is to actually reinforce the agreed payment terms from the get go. No, I do not mean getting stroppy if they have not paid by the due date but to have processes that remind them that a payment is due and then a follow up call the day after it was due to see when payment will be made. All too often, when payment terms are not followed up a client will pay when it suits them rather than stick to your terms – and so will pay people who actually chase them ahead of you.
Not always easy to achieve, but you may be able to direct debit a client for the payment of their invoices – this is something that happens quite regularly in some sectors of the Recruitment Industry. Also, there are insurance products in the market to cover you for non-payment of your account (debtors insurance) – these can be cost prohibitive but could make sense as a way to manage cashflow risk.
Think about your Margins
This is very important for your business and when I talk about margins I am talking about “the gross margin between what you sell and what it costs you to sell it”. To be a little clearer, I am talking about the direct costs of that sale – eg in Temp Staffing it would be the pay rate + on-costs (superannuation, workers compensation, payroll tax, ACC levy, etc etc) – not about all of the costs you then will need to incur to run your business (eg your salary, rent etc etc).
Now – when you think about margins – think about percentage margin – and that percentage being a percentage of your revenue that is margin (not a percentage of your on-costs that is added to your on-costs to get your charge rate). For example;
You, hypothetically, want to make a margin of 20% of your sales as Gross Profit – so if all of the cost for paying a Temp is $27.00 per hour (ie pay rate plus on-costs) then the charge rate would be $27.00/100%-20% (or 27/.08) = $33.75. To check then 20% of $33.75 = $6.75 (and $27.00+$6.75 = $33.75).
Why you should Think in % and not in $ or £’s?
If you think in terms of $ gross margin per hour and not percentage you start to move away from a simple way to communicate gross margin profitability to your team. This is because your pay rates are going to differ from role to role and so if you think in $ terms your actual % margin is going to be different – ie making $5 per hour on a $10 charge rate = 50% margin – make the same amount on a $50 charge rate and it is a 10% margin.
Also, by thinking in percentages it makes it more straightforward to set high level goals for your business. Eg Imagine that to run your business (ie the cost to pay you, staff, rent, mobiles, coffees etc etc) is $250,000 per year. So if you opened your business and sold nothing for a whole year you would have lost $250,000. Now if you are thinking in percentage values you can quickly work out how much you need to sell to either cover all your costs and/or make a profit.
For example – say that in addition to covering your costs you wanted to make $100,000 profit – so you would need to have a total gross margin of $350,000. So how much would you need to sell to achieve this? Well – what is your margin? For example, let’s say that your average gross margin is 20% – then it is easy to work out how much you need to sell – $350,000/20% = $1,750,000 pa in sales.
From here – it would be easy to break that target of $1,750,000 in sales down to how many Temps would you need to have out per week.
To do this you would use an average/typical hourly charge rate that represents your business to work out how many temps you’d need to have out (on average). Eg in this example imagine your average charge rate is $30 per hour and an average temp works 40 hours a week then you would need 28.04 temps working (ie $1,750,000 / 52 weeks / 40 hours / $30 per hour).
So your team’s target would be approx 28 temps out each week (at an average 20% margin) to achieve your goal of running the business and making $100,000 profit.
Think outside the Square
Temp Staffing businesses are cashflow intensive and so an option that may be of interest to your clients is for them to pay the temp staff directly and for you to charge a margin for your service. This may not suit all sectors but it is not uncommon and by not having the need to pay the temp staff then the impact on your cashflow is vastly improved.
Yes, all of a sudden your revenue is less but your revenue is now all 100% gross margin!