Because I’m often asked
Let’s face it, Cash is King and if your business pays temporary workers weekly but your clients don’t pay for 30 plus days, you are going to need significant work in capital. Starting with cash flow projections you need to be looking ahead overall say for a 12 month period, but with a 3 month rolling forecast, backed up by daily monitoring and adjustment. You will need to do this to ensure that despite optimistic sales and profit numbers that you genuinely have the cash to survive, and meet your liabilities in a timely fashion. Indeed fast growth although desirable brings with it cash flow pressures as your weekly costs increase but your debtors take longer to pay.
Obviously work in capital can be raised in a number of ways, including cash investment, investors, loans and factoring. Without good financial management an agency will find it difficult to attract any of these options or indeed service them adequately. Failure to deliver against financial forecasts could result in stakeholders losing confidence and withdrawing funding. A good honest regular updating and relationship management of stake holders is key.
The cost of this financing is also an important consideration and can be debilitating and restrictive. These costs should be included in any commercial expansion decisions.
Cash-flow forecasts should be “live” and linked to revenue (both volume and rate) and cost projections, constantly being updated and reviewed. Winning or losing a contract will need to lead to decisions when overlaid on cash flow
Business Plan, Budgeting and forecasting
Start with a business plan, a projection of what you believe the next 12 months, will bring, extrapolate this for say 3 or 5 years. To create this you will use key business driver information. What is in the pipeline, the probability of each client inthat pipeline, the expected volumes and margins, overlaid against variable costs such as consultants and fixed overheads such as property, insurance, licenses, HO overheads. This will give an indication of where you are now and where you realistically intend to be. You can use this to attract investment and establish strategy and goals
Use sensitivity analysis to create different scenarios, best case and worst case scenarios. Have variables such as temp volumes, margin rates, perm placement numbers, estimated credits. Link to variable costs such as consultant cost, bonus. All this combined to create an annual budget.
Then regularly forecast the future position in the light of recent actual profitability and events. The regularity of this forecast may depend on volatility of clients, seasonality, contract wins and losses. The need to link to cash flow and how demanding that cash flow is may need to weekly profitability forecasting
Margin management and pricing
Don’t underestimate the impact on the margin% can have on your business. A very small % movement in terms of cash can be hundreds of thousands of pounds and a reduction in margin percentage can be unsustainable. Transparency, visibility and regular monitoring of margin % is essential to maintain profitability. Watch out for margin dilution caused by; un-billed time-sheets, non-chargeable bonuses, increase in the use of second tiers, use of PAYE when Ltd Company or umbrella would better maintain higher margins (of course subject to legislation).
Use these to validate your projections, to check that they make sense. Look at growth projections and try to put simply what is driving that projection. Say you predict a 25% revenue growth, be clear exactly how this is being derived, is it for existing *like for like” business, how much is from new or lost business. List out the contracts very simply the revenue values and margins – does it stack up? Do the same with costs. This way you can test your assumptions make sense. “Death by spreadsheet” can result in mistakes, which a casual track and sensible “standing back” approach could prevent. Don’t be frightened to challenge your FD. Involve your operators in developing the projections, hold them accountable and attach their commission schemes to them (though this in itself is a whole other emotive topic)
Balance Score Card/Key Performance Indicators
Use a combination of financial indicators and non-financial drivers, for example activity related drivers such as cold calls, meetings, no. of temps working, hours billed, charge rates, pay rates, placements out, compliance audit results, debtor days when overlaid with financials such as revenue, margin and costs, can give a good indication of the “health of a business”. In every business I get involve in I develop a balance score card which I call “HOBI” Health of Business Indicator. Then this is used to understand if the health is improving or worsening and using weighting decide where our efforts are best invested.
Balance Sheet Control RAG reporting (Red Amber Green)
Basic but obvious, a necessary evil. Ensure that the balance sheet is regularly reconciled and adjustments hit profit and loss. Sounds ridiculous but I have seen disastrous situations where costs are hidden in the balance sheet and not found until a year-end audit. Without regular reconciliation of the balance sheet you cannot trust your profit statements. Key reconciliation accounts are obviously the bank but in a recruitment company, wages control, holiday pay and bonus can lead to nasty surprises if not managed properly. Key accrual assumptions need to be questioned as historical behaviour may have changed. Bad debt, incorrect rates, missing timesheets, credits etc. need to be dealt with monthly not annually or the business may very well be overstating margin. Leading to inappropriate decision making with regard to cash flow and particularly investment in headcount
Due Diligence and Exit
Finally, apart from all of the above being good practice, if you come to sell the business, poor financial management will lead to a reduction price. Loss of credibility in terms of projections will lead to a reduction in valuation, as will any areas of compliance that raise concerns.