Why your recruitment agency should review its credit risk strategy
It’s unusual for recruitment firms of all sizes to NOT have some form of credit risk management strategy in place – it makes sound business sense after all – and it’s also a key responsibility for Finance Directors. But what IS unusual is to have to make substantial changes because what has been sufficient before is no longer working as effectively. After several years of unprecedented turbulence and incredibly challenging economic circumstances for businesses everywhere, now is the time to bolster your approach to credit risk and protect your firm going forwards.
Existing customer behaviour has changed
Across the recruitment sector, Finance Directors have consistently been reporting an increase in late payment and bad debt. Admittedly, late payment in particular isn’t a new issue, in some instances simply because it’s difficult for a small firm to insist on prompt and beneficial payment terms from much larger organisations with protracted payment processes. Unfortunately there have always been some who make you wait longer than seems reasonable, but these were factored into your cashflow forecasts and the damage was limited.
But customer behaviour has changed.
Joint research by Pay.UK and the Chartered Institute of Credit Management (CICM) in 2021 revealed the extent of the issue. More than half of all of the UK’s smaller businesses suffered from late payment, three quarters of those experiencing late payments received payment one month or more over agreed terms, and 27% waited longer than two months to get paid.
One of the unforeseen consequences of the global pandemic was that every business in every sector was impacted in some way, some considerably more than others. What recruitment firms have seen is that customers that were consistently reliable and trusted to pay in good time prior to the pandemic suddenly started to behave differently. Tough economic times means many of your trusted customers will have struggled to pay on time; and some have continued to have problems. For recruitment businesses focused on the hardest hit sectors such as hospitality, leisure, construction, agriculture and logistics, it’s been incredibly difficult to stick to cashflow forecasts.
New customers bring new risks
So how has the sector responded? For many recruitment firms, whether primarily focused on permanent or temporary placements, finding a way through the current tough economic situation means proactively seeking out new customers. This is a sensible strategy because increasing your customer base isn’t just about boosting income, it also means spreading your risk – and that is good for business resilience. Plus it’s also a proactive stance that business leaders and recruitment consultants like because it widens the net for potential business.
However Finance Directors must ensure that the firm proceeds with caution. Targeting new customers and/or sectors is risky with no inside information, and no track record of business dealings. The nature of the recruitment sector means that the service (temporary staff or permanent placements) is delivered before being paid. So for every customer, you are effectively providing services on credit. Going into new relationships with new customers is risky if you accept their reassurances in good faith, only to discover they are a tardy payer or worse, become a bad debtor.
Times have changed and so must credit risk policies
Even when you have a good set of processes in place for new businesses – times have changed and what may have been helpful before as a means of minimising risk may no longer be as effective now. The combination of the pandemic, Brexit and even the war, created a ‘perfect storm’ where businesses of all sizes were suddenly faced with having to take drastic action to protect their own financial stability – or risk severe problems or even failure. Difficult times call for a different approach – and Finance Directors must stay alert and respond to this shift in behaviour.
Prevention is the best strategy
In this ‘new normal’, a new preventative risk strategy could make a real difference to your cashflow and profitability. Treat every customer – both new and existing – to a fresh credit risk assessment. With easily accessible tools such as the Access Business Health Dashboard (developed in partnership with Experian), it is quick and simple to build a clear picture of the financial stability and payment behaviour of each business you want to deal with. Forewarned is forearmed – so if your credit risk assessment highlights issues, you can choose to adjust your income projections, adapt your terms of engagement, or even decline the booking altogether.
As well as having access to the right information, key to a successful prevention strategy is to engage with your sales consultants at the earliest opportunity. The ideal approach is to give them access to risk data in advance so they can decide with more confidence who best to target. In the current climate of labour shortages and high levels of vacancies, consultants could also use credit risk data to make a more informed decision about where to place their limited reserves. Clearly the client who looks like a better bet regarding payment would be a better solution for the firm than one that might be very keen to engage but not so keen to settle up on time.
Tailor your terms
The added advantage of access to up-to-date credit risk data is that it makes it possible to adjust your usual trading practices to take account of the delays you are likely to experience. Rather than simply offer the same terms to all your clients, you could make more informed decisions about individual organisations as well as specific sectors and adjust accordingly. It’s also useful if you have the resources available to attempt to engage on a case by case basis and agree what might be reasonable in advance. That way, you’re more likely to get the expected response, rather than be unpleasantly surprised and adversely affected by late payments. It’s also good to avoid having to invest time and money chasing bad payers once a problem has arisen.
Get the support you need
Every firm quite rightly wants to protect their business cashflow and avoid bad debt. When faced with so many issues, it makes sense to use specialist support to help your firm to weather the storm. And looking forwards, a more robust credit risk strategy will not only help you to navigate the current market more confidently, it will also continue to boost your bottom line once your business enters a more stable phase and hopefully starts to grow.
At The Access Group, we’ve worked with many recruitment firms and our technology specialists understand the issues you face. The combination of our Recruitment CRM software and Access Financials will give you a multitude of benefits. And with the addition of our new Business Health Dashboard, powered by Experian, you’ll also find invaluable credit risk data to support your decision-making. Why not contact us today or book a free demo and find out how we can help your firm move forward with confidence?
Want to know more?
Download our FREE Guide to Improved Credit Risk and Cashflow for Recruitment Agencies for more detail on the factors driving poor risk management and the actions to take to alleviate the impact.
