What recruitment firms need to consider to prepare for a 2023 recession

It’s estimated that there are 18,000 companies in the recruitment sector, and that in the UK alone they generate a combined revenue of around £17bn, and profit of about £1bn.

Low set up costs and the availability of invoice finance to fund working capital means the barriers to entry are low. This in turn leads to intense competition, with a tendency for firms to chase revenue – sometimes at the expense of margin.

Recruitment outperformed the economy in recent months: It bounced back strongly after the pandemic as a result of high employment levels, and a more flexible workforce that forced businesses to invest in recruitment as part of their rebuilding efforts.

Although the labour market remains strong, there is growing consensus that the UK economy will remain in recession through much of 2023. It is likely that the recruitment sector will feel this impact. In the short term, skill shortages in certain areas will still create opportunities to place staff. But the longer-term outlook is unclear.

Recruitment practices that supply financial services, accountancy, technology and healthcare continue to perform relatively well and should continue to do so.

However, firms that rely heavily on construction, engineering, manufacturing, hospitality, retail and travel and tourism may see their revenues fall in the coming months. That’s because reduced demand and increased company failures are likely to hit these markets.

Key 2023 considerations for recruiters

1. Implement better management of your short term cashflow

Cash flows for recruitment practices are usually straightforward, and predictable in the short term. A short-term cash flow forecast can be a reliable and practical tool that gives assurance of adequate headroom, or early warning of potential cash pressure.

Effective short term cash flow management often requires a weekly forecast over 13 weeks. Invoice discounting facilities should be modelled carefully, and take account of excluded sales and facility caps. Care should be taken to update the forecast each week, ensuring all receipts and payments are captured and the opening bank balance is correctly input.

“Uncertainty” is often cited as a reason for not forecasting over the medium term, but this misses the point. Scenario planning and sensitivity analysis can allow management to plan for various contingencies and ensure headroom is in place. Key considerations may be:

• funding required for new customer accounts;
• impact of loss of key customers;
• seasonal cash pressures; or
• growth leading to pressure within existing facilities.

2. Understand and manage your critical success factors

Avoid the tendency to focus on recent sales performance. Consider forward facing metrics such as pipeline, conversion rate and trends in key customer accounts. Wider qualitative measures to consider on an ongoing basis are the depth and quality of customer relationships, with a focus on customer feedback and complaints.

Managing profit margin is of critical importance in an inflationary environment. It’s also particularly challenging in a very competitive industry, such as recruitment. Avoid focusing your efforts and resources on areas where supply is more commoditised and switching costs are low. Lasting customer relationships based on reliable service, and a supply of staff across multiple business centres/departments, will help to tie-in your customers and to maintain and improve your margins.

Carefully manage your overheads, and take action early where obvious risk areas are identified. Consider the full implications of proposed cost-cutting measures.

Ensure management accounts are produced and reviewed on a timely basis, ideally within two to three weeks of month end. Results should be tracked to budget, with actions implemented quickly where underperformance arises or where a change of course is needed.

3. Understand and carefully balance your stakeholders’ needs and priorities

Consider carefully what information can be shared with your various stakeholders in light of commercial sensitivity. Provision of information can allay stakeholder concerns but it needs to be robust, internally consistent and to avoid opening fresh concerns.

• Lenders – Ensure regular and open communication with your existing lender. Not only does it build trust and confidence, but talking through early projections or highlighting significant new customer wins or losses can help to ensure funding caps or parameters will meet your future business needs. Is your lender best placed to these requirements? Less conservative facilities or pricing may be available elsewhere.
• HMRC – Where additional time is needed for VAT or other tax liabilities, a structured proposal supported by realistic forecasts is more likely to gain HMRC’s approval. Once a time to pay arrangement is in place it is important you stick to it. HMRC may aggressively chase missed payments, and that could invalidate the agreement completely and lead to recovery action, including the use of winding up petitions.
• Suppliers – Consider who your critical suppliers are, any continuity risks and how these suppliers assess your creditworthiness and credit limits. Take the necessary steps to open lines of communication with credit insurers or ratings agencies, and try to maximise your credit limits by sharing up to date information.
• Customers - may also use credit scoring agencies to assess continuity risks in competitive tender situations. Credit scores tend to be based on very limited information in the public domain, so engaging with referencing agencies can improve your score.
• Shareholders – It may be necessary to have difficult discussions with shareholders in order to prioritise upon medium term stability over short term distributions. Lenders and HMRC are less likely to be supportive where excessive dividends have been drawn. Ensure dividends are affordable in the medium term, supported by robust forecasts and aligned with earnings rather than simply based upon short term cash availability.

4. Consider customer concentration and actively manage bad debt risk

Customer accounts in the recruitment sector can grow quickly. Relative importance can also change where other customer accounts decline in size or seasonal factors leave a recruitment firm exposed to a particular customer, albeit for a limited period.

Invoice discounters will often cap funding levels to 20% to 30% of the ledger against specific customers for good reason. The failure of a key client has an immediate cash impact arising from the associated bad debt and an ongoing P&L impact with a loss of future sales. Failing to identify increased concentration can mean missing a funding gap.

Communicate regularly with your key customers to understand their future requirements. To mitigate concentration risk, consider targeting sales efforts and resources to work towards a good spread of customers. Ideally this means avoiding exposure to single industries and mitigating the risk of disputes, loss of contract, seasonal cash pressure or customer failure.

Ensure there is a robust procedure in place for agreeing credit limits with customers. Regularly review your firm’s exposure to bad debts, and ensure there is strong credit control with clear actions where debtor days are drifting on accounts. Consider using credit insurance to protect against bad debt risk or credit scoring agencies to determine limits.

5. Ensure your finance function is fit for purpose

Your finance function needs to be fit for purpose from the top down. Smaller recruitment agencies may find achieving a balanced skill set at board level more challenging.

Ensure your, team, technology and processes are fit for purpose. You can quickly outgrow your systems (or they become outdated). Prompt and accurate invoicing is critical if you want to avoid locking up your working capital – which can happen when invoices are delayed, unsupported by paperwork, or incorrect.

The finance team’s main areas of focus are:

• production of robust MI and short and medium term financial forecasting;
• strategic input to the board;
• managing key stakeholders such as lenders;
• financial control, including efficient operation of sales invoicing and credit control; and
• payroll processing.

Seek advice on your financial processes, and think about outsourcing areas that are inadequate or costly to maintain. It may be more cost-effective and efficient than getting these functions wrong.

How RSM can help

Our restructuring team helps our recruitment clients to grow. We can support your business with:

• financial forecasting;
• refinancing;
• building confidence with your existing lenders; and
• securing payment plans with HMRC where necessary.

Contact Richard Leach if you would like to discuss how these issues may impact your recruitment business.