Limited cash flow is the biggest threat to the labour hire industry. You may find that in your labour hire firm, invoices are often delayed. Your business may need to pay contractors weekly or bi-weekly, but your clients pay 30-60+ days after receiving your invoice. Unpaid invoices make it difficult to recruit new talent and keep the doors open as every new person you recruit to place with a client on a labour hire basis expects to be paid on time.
Once you start experiencing cash flow problems, the situation gets tough to fix and often results in the situation deteriorating.
Further, with the new mandatory 3% minimum wage increase in Australia now in effect, it will likely impact the cash flow and margin for many labour hire companies, making it more difficult to stay afloat. But it is not all doom and gloom and here’s what you can do to address the situation.
Cash Flow Management Tips for Labour Hire Businesses
Without sufficient cash, labour hire like all businesses can’t function properly. The best way to avoid cash problems is to manage them ahead of time. Review your income and expenses regularly.
Here are a few important tips for managing cash flow:
- Make the most of your organic cash flow. You can do this by setting your payment terms or closely monitoring your cash flow forecast. Build your payment terms around the concept of on-time payments. In terms of cash flow forecasting, your cash flow statements will project your future financial position based on expected payments and receivables. Based on this you can manage your cash on a daily and weekly basis. You can then manage ageing invoices before they become overdue so as to ensure the cash is in the bank before you have to pay your staff wages.
- Choose a flexible funder. There may be times when you need cash right away. A flexible funding solution will give you the options you need. Otherwise, you may find yourself having to get more funding regularly. Consider a flexible line of credit.
- Use Invoice Finance or Invoice Discounting. Invoice financing is very powerful for labour hire businesses. Through invoice financing, labour hire companies are able to get flexible funding early and ongoing. Funding provided is based on the company’s billings of the staff to their clients (not their profitability). Invoice Discounting allows you to release the value of unpaid invoices as soon as they’re raised. Using an invoice financing / discounting facility, you simply bill clients in-line with your current processes, then send a copy of any new invoices across to your lender. After a short (24-48 hour) wait, your lender will then release funds up to 85% of the invoice total value; allowing you to maintain positive cash flow, and invest money while you’re waiting for clients to settle their accounts. Invoice Finance works much like a conventional line of credit (even though it is not a business loan) in that it allows your company to draw funds as you invoice clients. You “repay” the line down as your customers pay their invoices (30-60+ days later). This type of funding is used to better manage staffing, operations, and growth, and is based on your invoices and will grow with you.
- Have a look at how you pay your suppliers. Income is only one part of the picture. Expenses is another one. Take a look at your costs. Are you paying suppliers right away? Could you qualify for Net 45 or Net 60 terms? Managing your own invoices can be a way to improve your cash flow without bringing in cash faster.
Cash flow is the lifeblood of businesses, but with a cash flow intense business such as those in the labour hire industry, it becomes even more important. Fall behind on your invoices, and you could find it difficult to maintain your current operations. Poor cash flow is one of the leading causes of business closure.
You can improve your position by managing costs. When cash flow becomes a problem, pull back on expenses. Collect invoices due and reduce spending. By acting before cash flow is a problem, you can prevent more serious issues.
The labour hire industry is very competitive, and most firms are operating on tight margins. If you don’t have sufficient funding, other companies will catch up. Most clients are not loyal to a single labour hire company. You need a positive cash flow to be able to compete.
At OptiPay, we can help. We make sure that you can be confident in your working capital and your staff paid on time so you can efficiently provide human resources faster than your competition. Talk to OptiPay today.