Recruitment businesses are fairly simple when it comes to financial reporting. The majority of transactions occur within the top half of your profit and loss report – contractor income, contractor costs and perm income – and the only other significant overhead is staff costs (including the directors’ salary and dividends!).
With only a few areas to focus on and the importance of an efficient cash cycle; keeping track of key financial metrics is essential to becoming a successful recruitment business. We’ve summarised our top five financial KPIs below that we discuss with our clients:
1. Profit contribution by consultant
We all know that staff are your greatest asset in recruitment however they can also be your greatest liability when not performing. Accountability is key to running a successful sales team and by keeping track of individual performances as well as team performances you will be able to see which consultants are genuinely creating profit for your business.
When calculating profit contribution by consultant, I would recommend only considering direct costs such as contractor costs, salaries, commission, employers national insurance, pension and so on. I would not recommend allocating overheads as not only will this absorb too much time with analysing and allocating, overheads should be reviewed as a total cost to the business to ensure you’re obtaining sufficient return on investment.
I regularly get asked ‘we’re making good sales but I still can’t seem to make a profit’ and the answer more often than not has been in the detail of profit contribution by consultant. Also note, it may not be poor performing consultants but a commission structure that is over rewarding your staff.
2. Staff costs to net fee income %
Have you ever considered how much of your gross profit (net fee income) you pay to your staff? This KPI can provide you with exactly that.
At the end of 2016, we did some analysis across our client base and the industry to find out the average percentage of net fee income that is paid out to staff. The results vary across sectors but generally range from 35% to 50%. Therefore for every £10,000 of net fee income generated recruitment businesses are spending between £3,500 and £5,000 on staff costs.
Assessing this ratio instantly tells you how productive your work force is and whether you are overburdened with non-fee earners.
3. Contractor Margin and Perm fee %
Of course this KPI is a given and I’ve never come across a recruitment business that does not monitor their margins. However, I have come across businesses that do not drill down into the detail. The overall margins are reviewed on a monthly basis, but individual contracts that have been long running and no longer make sufficient profit are sometimes disguised by the more profitable contracts. End clients occasionally extended contracts squeezing margins further and further, resulting in the time (and cost) to manage that particular contract outweighing the income generated.
I would recommend, if you have a sufficient timesheet system in place, reviewing margins on a contract by contract basis and consider whether some contracts are worth terminating early if possible.
4. Debtor days
The same old cliché ‘cash is king’ couldn’t be more important right now, especially with Brexit and the upcoming election placing further pressure on margins and slowing down the perm market.
In basic terms, debtor days are usually calculated on a monthly basis and show the average time it takes for a client to pay an invoice. This should be compared to your payment terms and if the result is less then congratulations you have some very efficient clients! If the result is much higher then you may wish to address your credit control procedures and/or your client relationships.
5. Asset to debt ratio
In a nutshell this is the ratio of total assets to total debt, so how much of company debt is covered by assets held e.g. customer debtors list, bank account etc. Ideally if the result is greater than one then the company is in an excellent position. For example, if you finished trading immediately, all of the company debt can be paid.
Most recruitment businesses understand these KPIs and are either reviewing them on a regular basis or have the intention to. There are many products available that can provide this information with very little input on a monthly basis such as Xero and Futrli. If you would like to find out more then please do get in touch by email at email@example.com or call on 01462 687 333. We would be more than happy to carry out a free review on your current financial systems and provide you with our example board pack.