Despite positive economic data since the EU referendum in June, the future direction of the UK economy is uncertain and many industries face a turbulent time ahead. Our research shows that overdue payments, claims and insolvencies are likely to rise in the next few years, especially if the UK leaves Europe with a ‘hard’ Brexit (no Free Trade Agreement).
Recruitment firms are naturally dependent on the economic wellbeing of the sectors they specialise in, and those in hard-hit areas, such as construction, oil and gas, and manufacturing, may already be feeling the pinch. There is already evidence of a skilled labour shortage in some sectors, which is likely to be amplified post-Brexit. This could lead to greater competition for candidates between recruitment firms and encourage firms to take risks elsewhere in securing business.
Insolvencies are inextricably linked to an increase in late or defaulted payments – damaging for any business, but particularly for temporary agencies which, unlike the permanent recruitment firms, are obliged to pay their agency workers regardless of whether they have received payment themselves.
However, insolvencies rarely occur without prior warning, and should businesses be aware of what to look for, they can often protect themselves before problems occur. Whereas some signals are obvious, others may be harder to recognise, but caution is key to avoiding financial difficulty.
1. Slow payments
Any substantial rise in a particular client’s Day Sales Outstanding (DSO) should be flagged immediately, especially if they are still being supplied with additional staff. Should a firm repeatedly fail to comply with a previously agreed credit arrangement, they are likely to be suffering from strained cash flow.
2. Be cautious of new clients
In the scramble to secure new business, it can be easy to jump at the golden opportunity of a company looking for a large number of staff. The appeal of such a client can mean that recruitment firms may be tempted to defer making the necessary checks and investigations needed to confirm that the business is financially safe, in favour of placing workers in jobs.
This leaves recruitment firms vulnerable, potentially having to cover a substantial amount of wages should it emerge that the client is in danger of insolvency. Appropriate credit checks should always be taken to ensure financial viability before placing staff, no matter how enticing a new business opportunity may seem.
3. New financial arrangements
If a company is in the process of seeking new financing or changing banks, it usually indicates one of two options. The shift in finance could be to fuel expansion, boding well for future business. However, it could also be to cover large losses to try and stay afloat. Until the reasoning behind the move becomes clear, it is best to treat the client with caution.
4. An upswing in credit checks
Again, a continuous stream of credit enquiries can either represent a positive growth period and expansion into new markets, or, a warning sign of poor credit. A rise in credit checks could signify that the company is having trouble paying its creditors, or is seeking credit to cover financial losses. Should other suppliers appear to be nervous about a company’s debts, it is wise to follow their lead.
5. Loss of key people in the business
A dangerous warning sign that can be often overlooked is the loss of important managers within your client’s business and subsequently, the loss of key skillsets and client relationships. Not only could this negatively affect the business’ prosperity, it could also weaken a recruiter’s connections with the client as a supplier. Similarly, recruitment firms are well placed to pick up on a high staff turnover rate within a company. This often signals internal unrest, hinting to early signs of trouble within a business.
6. Changes in public information
Be aware of clients’ statutory information. Late account filings or changes in annual accounts closure dates can indicate a desire to delay reaction to poor financial figures or an auditor’s assessment. It may also suggest that the company has underlying issues that create a delay on proper accounts approval.
7. Continual excuses
If a client consistently provides a stream of excuses for not delivering payments or other business-critical activities, trouble is usually on the horizon. They may give reasons like problems with computers or systems, an audit currently in progress, or changes to finance arrangements causing delays. In addition, a company which declines to provide standard information or refuses an offer of a site visit likely has something to hide.
Fundamentally, it is always best to trust instinct, common sense and good financial management. Recognising and monitoring early warning signs closely, while putting a robust credit risk management strategy in place can help recruitment firms steer clear of financial difficulties created elsewhere in the supply chain. Err on the side of caution, assess the likelihood of non-payment before taking on new business, and seek advice and peace of mind from the likes of your bank, financial advisers and credit insurance companies on the best way forward.