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The role money plays in the success of an enterprise is at the core of many hugely popular and critically acclaimed screen dramas.

Whether it’s Wall Street, The Godfather, Casino, The Sopranos, Breaking Bad, or The Wire, the making and losing of money creates drama that screenwriters, and audiences, love.

The depiction of cash is cinematic gold (just check out Breaking Bad Season 5: Episode 8 in which Skyler and Walt discuss the enormous pile of cash they are looking at).

The role of cash in growing recruitment businesses was a topic raised in the recent Taking an agency from start up to success Bullhorn Engage panel session I attended, featuring owners, Craig Sneesby (u&u), Samantha Miklos (Cornerstone) and Henry Gatehouse (Talenza).

Sneesby said, “Growth is about cashflow. Knowing that after every downturn there’s a sharp recovery we grew our headcount by 14 across the COVID (lockdown) period.”

He didn’t disclose how much this investment cost however a rough estimate of the additional salaries, payroll on-costs plus computers and phones wouldn’t leave much change from $1.5 million per annum, maybe even closer to $2 million.

Greater financial success for almost every recruitment agency is delivered by a growing headcount because more consultants can handle and fill more vacancies and more specialised and skilled back office staff can be employed to deliver important internal support services in areas such as marketing, IT, finance and administration.

As Greg Savage wrote nine years ago Revenue is vanity. Profit is sanity. Cash is reality.

The cost of not having cash in the bank to finance your growth is made apparent with just one example – ASX-listed Ignite. In its twentieth-century heyday Ignite was known by its original name, Candle, and it was a cash-generating powerhouse because of its deep IT contractor book.

In the 2022 and 2023 financial years, Ignite’s debtor finance facility cost a total of $4.3 million when the same two years produced only $7.4 million of combined gross profit after employee expenses (but before deducting any other expenses such as accommodation, insurance etc). You don’t have to possess any accounting or business qualifications to recognise how crippling this lack of cash has been to Ignite’s growth prospects.

How do you make, collect, and keep more cash?

This might seem like a very basic question with an obvious answer – generate more jobs and make more placements. Which, of course, is true but woefully incomplete.

Here’s six more:

  1. A high job fill rate – most agencies operate on a contingent basis so if you don’t fill the job you don’t get paid. Every job not filled involved a consultant investing time; time with a fixed cost (base salary) attached.
  2. A high conversion rate – the conversion rate is the percentage of your gross profit (or net fee income) that you make as operating profit. In their 2006-2008 golden period Hays globally had a conversion rate consistently around 34%. In the 2008 financial year, Hays Asia Pacific (inc. ANZ) reported an astonishing 47.3% conversion rate. A high conversion rate depends on strong cost control. The largest cost item for every recruitment agency is employee salaries and bonuses. In a recent conversation, an owner mentioned one of her ‘rising stars’. It turned out this ‘star’ was earning just north of $150k for producing around $330k of net fee income. It’s impossible to have a respectable conversion rate if moderately-performing consultants are being paid 45% of their fee income.
  3. Team stability: As recent research has demonstrated, team cohesion is the most critical, yet underrated, aspect of producing outstanding results. Although I have no recruitment industry research to support my assertion, I am confident that those agencies that are delivering the most profitable growth, compared to their sector peers, are doing so with a foundation of staff tenure that’s well above the industry average.
  4. Credit checks: There is no cash until the invoice is paid. Conducting credit checks is a sound foundation, especially in a local business environment where corporate collapses have just hit a nine-year high.
  5. Timely cash collection: The difference in the efficiency of collecting cash from invoices issued was starkly illustrated in 2016 through an analysis of Days Sale Outstanding (DSO) of the 25 largest recruitment agencies in Australia by Staffing Industry Analysts. Hays had the best DSO performance of all 25 agencies with a DSO of 22.1 days against an average of 37.9 days. The bottom three DSO performing agencies were Workpac; 62.4 days, Brunel; 55.6 and Clarius/Ignite; 54.1. In summary, Hays had a 71% better DSO performance than the average large agency, even though they had the most cash to collect (an average of $6 million per day) compared to their 24 largest competitors. The evidence that the most profitable agencies also being better at collecting cash remains to this day as Greg Savage’s blog from three weeks ago amply demonstrates.
  6. Keeping profit as retained earnings rather than as dividends for shareholders: Once shareholders have been paid dividends from profit, they are not inclined to re-invest it back in the business. As many recruitment agency owners have discovered over the years, the return-on-capital available from a successful recruitment business exceeds almost all other forms of (legal) investments. The temptation to withdraw cash as dividends and spend it on real estate, boats, cars, hobby businesses and other forms of illiquid assets, in the assumption the good times will keep rolling can become a hard habit to break, even when the job market slows and cash is short.

Cash is king for growing agencies, or as Silvio (Tony Soprano’s consiglieri, below left) says, “You’re only as good as your last envelope.”

Related blogs

What drives performance more than skill and culture? The answer will surprise you

Global 2016-17 results: Hays is an awesome cash machine

Why Hays is the best run recruitment company in Australia

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