Written by Trevor Foster
As the temporary staffing market continues to grow rapidly, many independent recruiters have been considering adding contract placements to their list of services in addition to permanent placements. In doing so recruiters can leverage their existing contacts and clients to add significant revenue that can be very profitable. Of course, with any change, there are some important items to consider before adding this service – many of which are straightforward and some that are not.
This series of articles will not address all of the individual components of adding contract placements (like providing employer of record and payrolling services for the contractors placed at client sites). Instead, the focus will be on the top 3 cash flow problems that recruiters face when getting into temporary staffing – a vital part of providing complete contract placement services for your clients.
As with any small business, cash flow is one of the most important things to manage. It is, similarly, one of the most frequent concerns keeping owners up at night. With the nature of temporary staffing (where the majority of billing is for paying wages, taxes, and benefits for employees) cash flow becomes an even larger issue to manage. When considering adding contract placements to your business, cash flow problems generally come from three areas; invoicing, collections, and contract management.
This article is part 3 of a 3 part series designed to highlight those three problems with cash flow as well as some tips to manage them.
Contract Management
As the provider of employer of record services for contract placements, you may have many concerns when signing an agreement with a new client or for a new position. With all the terms to agree on, it can be difficult to apply appropriate attention to the terms that most affect cash flow, not the least of which is payment terms.
Additionally, with the nature of providing contract placements, it is often difficult to get agreements signed until after the candidate accepts the position and begins working. To complicate things further, more and more clients are resorting to using a vendor management system (VMS) through a managed service provider (MSP) which creates yet another layer of agreements between you and the client. Each of these areas must be appropriately managed to ensure cash flow remains positive.
Payment Terms
Perhaps the most common cash flow concern when negotiating an agreement with a prospective client is setting the payment terms. What often happens is that an agreement is nearly complete when payment terms come up and, in a rush to complete the deal, it is far too easy to accept the payment terms requested by the client without challenge. After all, it seems like a reasonable request to give Net 30 days terms when all of the clients other staffing firms grant that. You don’t want to risk losing a deal based on a few more days of floating cash.
As the employer of record providing payrolling services for contract placements, the majority of what you invoice is for paying wages, taxes, and benefits for employees. That means extending payment terms of even a few days can equal many thousands of dollars that you’ll have to put out before you are paid. This can be severely damaging to a company and can actually limit your ability to grow your business – you must have the funds available to front payments to and for employees when you bring on a new contractor. Allowing payment terms to extend beyond what you’re comfortable with is the single most common preventable issue faced when payrolling contract placements.
In addition to getting payment terms acceptable that fit within your cash flow plans, you must also consider a client’s credit worthiness. Many clients will agree to terms of Net 7 knowing that they traditionally pay invoices at Net 30. This information is often readily available by running a business credit check on the client before entering negotiations to work together. Doing business with a company that is having trouble paying their bills is a surefire way to create cash flow issues for your company as well!
Tip: Discuss payment terms and run credit checks as early in the sales process as you can – this information is vital to planning cash flow for your company.
Complete and Sign agreements before position is filled
Getting the payment terms you are comfortable with for a client that is likely to pay their invoices on time is easier said than done. Adding complexity to an already challenging task is the urgency with which most placements are required. You may find yourself struggling to fill a position for an immediate need, putting the contract on the back burner in order to win the business. This creates a number of issues, one of which is you lose negotiating power once an employee has started. If you are forced to treat payment and collections terms as an afterthought, you risk setting yourself up for cash flows issues down the line.
Tip: Understand all of the costs to fill a position, including the risk inherent with not having a signed agreement in place with terms both sides are comfortable with before allowing a temporary employee to start work.
Vendor Management Systems
A difficult situation to navigate beyond accuracy in invoicing, solid collections procedures, and strong contracts is having to do all of the above through a vendor management system (VMS). A topic that deserves its own lengthy analysis, suffice it to say that a full understanding of how VMS affects cash flow is beyond the scope of this article.
Unfortunately, when working with large (and increasingly, medium sized) clients, you will more than likely come across business that relies on a VMS through a managed service provider (MSP). This creates issues with contract management in general, but especially with respect to payment terms. It is not uncommon to see payment terms approach and even exceed Net 90 day terms. Something that can certainly have a significant effect on cash flow!
Tip: Navigate agreements involving VMS carefully to understand the total cost of doing business with this client. Explore options to find help in the form of other businesses with experience with that VMS and others.
The importance of having solid contract management practices in place can’t be overstated. It is far too late to worry about an agreement once a problem arises – unfortunately the “glass half full” mentality doesn’t work well when it comes to cash flow management. Approach all new deals with a measured caution that allows you to carefully negotiate favorable terms up front preventing unnecessary strain on your relationships and business in the long run.
Cash flow is one of the most important concerns for running a successful contract placement business that handles the employer of record and payrolling services for temporary employees. With careful management and proactive procedures, you can set yourself up for success with accurate and timely invoicing, structured and consistent collections procedures, and careful contract management practices. It’s important to not let cash flow management become an afterthought – stay on top of problems so you don’t find yourself with a wildly profitable contract placement business that’s running out of cash!
Tip: Like many parts of running your business, enlisting help with the things you aren’t naturally good at can provide dividends in the long run. Explore hiring administrative help or using a Back Office HR Outsourcing Services like Innovative Employee Solutions who can help manage these cash flow, employer of record, and payrolling activities so you can spend your time growing revenue for your contract placement business!
