Downturns in the recruitment industry have taught us to appreciate the recurring revenue that is generated from temp and contract placements from a Recruitment Agency. Contract revenue sustains a business in a downturn and is the lead recovery source of revenue.
Organisations that focus on contract placements – those that make it a specialisation and make it a substantial part of their gross profit contribution – tend to survive with less risk and then rebound quickly.
Establishing a contract recruitment business is not a simple activity. The barriers to entry are not high but they are complex. In this article we will concentrate on the activities from a contractor payroll and billing perspective.
Sophie Robertson of Younique Coaching has written a recommended book “Secrets to Running a Lucrative Temp Desk” and that has superb information on the front office client and candidate practices needed to sustain contractor placements.
Any recruitment agency undertaking temp and contract placement services requires strong systems in a range of areas.
Contracts, Awards and Margins
The consultant’s responsibility with a contract placement is significant. A properly completed activity here leads to profitable and low risk business for the recruitment agency.
Temp Consultants in a recruitment agency need to be the best and the brightest of the organisation. This gives a greater chance of personal success but also improves the opportunity of delivering an ongoing profitable and compliant solution to their clients, their contractors and their recruitment agency.
They need to have, amongst other attributes, a great understanding of on-costs, margins, relevant Awards, and health and safety requirements. While some of this knowledge can be developed as guidelines and procedures it cannot be “dumbed down”. The knowledge, experience and confidence to be inquisitive and to question is important to deliver client contracts that are unambiguous, legal, and profitable.
The middle office will check and verify contract conditions as part of the payroll onboarding process, but they are not likely to be involved at the right time of the placement activity – the responsibility lies with the front office consultants.
Onboarding, Timesheets and Payroll Processing
Onboarding is the first official step for the middle office function. Ideally, key data about a new casual employee, the client and the contract terms and conditions are delivered to the payroll system in an automated manner from the front office Applicant Tracking System (ATS). Next it is necessary to obtain tax, banking and superannuation details for the employee.
Receipt of client approved timesheets is the authority for payroll processing to begin. Hopefully this is an electronic process that reduces manual tasks, reduces uncertainty and mistakes, and improves compliance.
Time is required for collating, checking and follow up correspondence. Once uncertainties are resolved or a time deadline is reached then pays for the period are processed. Pre-processed payroll reports are generated for authorisation before final processing. Bank files are produced for payment to employees and payslips are sent from the payroll system.
Payroll data is collected from the payroll system and reports provided based on requirements. Key data required for the accounting system will be passed on, hopefully via automatic interfaces at the completion of a pay event. This General Ledger data includes Wages Payable, Superannuation and PAYG liabilities. Additional data is provided for invoicing for the client although the way this is managed will be system dependent.
Data will also be reported to the Australian Taxation Office (ATO) as Single Touch Payroll (STP) for each pay event.
Wage data will also be used for Workers Compensation declarations, calculating and distributing superannuation contributions, and monthly reports for the lodgement of Payroll Tax returns.
Each contractor placed by a recruitment agency usually creates negative cashflow, as the contractor is most often paid well before the client pays the invoice.
Many recruitment agencies have some level of invoice funding. Subject to certain conditions, they will receive most (but not all) of the value of the invoice immediately giving cashflow relief and allowing the recruitment agency to continue to grow.
Invoice funding is a mature market and there are numerous options available to business owners. Increasingly, a good technology solution allowing automated interfaces and account reconciliation, such as provided by APositive, is becoming a key selection criteria.
When bank branches used to be mostly manual, batches of paper cheques and forms were batched by “batch clerks”. Then the batches were added up in a pyramid until the whole day “balanced”. Usually no one could go home until that was done.
Most recruiters used to use spreadsheets to batch temp payroll runs. A column for invoiced, one for wages, then the various on costs, you are left with margin. At the end of the month the batches needed to add up to the amount shown in the back-office accounting system. This was a solid control on everything but margin. Sure, the margin percentage was accurate, but it is very difficult to see what makes it up other than by batch. Do some clients have vastly different margins than others, some of your internal teams, your offices, even each consultant? It also has the major drawback of the various weekly, fortnightly and monthly pay periods distorting monthly P&L numbers.
The other part of normal control, still used by many recruiters, is to have a spreadsheet template that each recruiter can use to calculate projected margin when they place a contractor.
Few agencies have processes that reconcile these two controls – one at the very front office and, the other at the back office. These days many organisations are running semi-automated systems that can muddy the waters even more.
Middle office is a term that comes from large financial market traders, the department that reconciles margin trade by trade. But also allows the data to be summarised, sliced and diced as needed.
Middle Office, as an outsourced contractor payroll service that also provides margin reporting, uses this principle, but also draws heavily from the management of professional services firms that bill by the hour. Professional service firms need to be able to understand margin well to survive. As things get tougher in the contracting market, so do recruitment agencies.
The format of a good margin report has not changed since the early spreadsheets. What is different is our ability to summarise various groupings, and importantly time periods, that make up the data. Payroll is not the point where margin is earnt. It is earnt hour by hour. We report based on authorised timesheet data, not just pay runs.
Middle Office provides you with a traditional report by pay run for compliance purposes, and monthly compliance reports for on-costs, but also, and this is the cool part, weekly and monthly reports based on authorised time sheet data. We provide these reports by client, by team and by consultant.
As can be seen in this brief introduction, establishing a contracting business requires a level of diligence and adherence to systems and processes not required in a perm-only recruitment business.
The effort required to build this level of sophistication is worth it. It may just save your business when the economy falters.
Thomas is a CPA qualified accountant, business advisor and on-demand CFO with over 20 years of experience running businesses. He has worked in senior finance roles with some of Australia’s biggest companies and best business leaders.
Thomas been an independent CFO for 20 years, working with B2B businesses from start-up to 30M turnover. Twenty years ago not many people knew what an Outsourced CFO was but they are becoming more widespread these days. Which Thomas thinks is a great thing.