Plenty of agency owners run a profitable business without ever feeling sure it is profitable. The accounts arrive once a year, the bottom line looks fine or it does not, and nobody explains what drove it. The good news is that a recruitment P&L is simpler than it looks. Once you know which lines to read, you can tell how the year is going in about two minutes.
The five lines that matter
| Line | What it tells you |
|---|---|
| Turnover | Everything you invoiced: perm fees plus the full value of temp billing. |
| Cost of sales | What you paid out to deliver the contract work: temp pay and employer costs, or umbrella and limited company invoices. |
| Gross profit (net fee income) | Turnover less cost of sales. The money the business actually earned. |
| Overheads | Consultant salaries and commission, rent, software, job boards, marketing, everything it costs to run the business. |
| Operating profit | What is left for you, before tax. |
Why turnover is the wrong headline
In a contract heavy agency, turnover is mostly money passing through. If you bill a client £1,000 for a temp and pay out £800 in wages and employer costs, your turnover has gone up by £1,000 but you have only earned £200. A perm fee of £5,000, on the other hand, is almost all gross profit.
That is why two agencies with the same turnover can have completely different businesses. The number recruiters use instead is net fee income, which is the same thing as gross profit. Track it monthly and judge growth on it, not on turnover.
Gross margin: the number to watch every month
Gross margin on contract work is gross profit divided by contract billing. It tells you how much of every pound billed you keep. Watch it for two things:
- A slow slide. Pay rates creep up, charge rates do not follow, and the margin falls a fraction of a percent each quarter. Nobody notices until year end.
- A sudden drop. Usually a rate keyed wrong, a temp paid for hours that were not billed, or employer costs that were not priced in. These are fixable within a week if you see them within a month.
Use our temp margin calculator to check what an individual placement really earns once holiday pay, employer National Insurance and pension are included.
Split perm and contract
Perm and contract are two different businesses sharing one set of accounts. Perm has near 100% gross margin, lumpy income and rebate risk. Contract has thin margins, predictable income and a constant need for cash. A single combined P&L hides both stories. Ask for them to be shown separately, at least at gross profit level.
Consultant cost against what they bring in
Your biggest overhead is people. The useful view is net fee income per consultant against what each consultant costs, including salary, commission, employer National Insurance and pension. Many owners work to a rule of thumb that a consultant should generate around three times their cost in net fee income, though the right figure depends on your model. Either way, this is the number that tells you whether a desk is earning its place, and whether you can afford the next hire. It is what our margin per desk reporting shows each month.
The lines that mislead
- Unbilled timesheets. If temps worked in the last week of the month and you invoiced in the first week of the next, the work and the wages can land in different months. Good monthly accounts accrue for it; rough ones do not, and the margin swings around for no real reason.
- Perm fees with rebate periods. A fee is not fully earned while the candidate could still leave inside the rebate period. Updated UK accounting standards for periods starting on or after 1 January 2026 put more focus on recognising income only when it is highly probable you keep it, so the timing of perm income in your accounts may change.
- Invoice finance. Money advanced by a funder is borrowing, not income. It belongs on the balance sheet, and the fees belong in overheads. If your funder's statement and your accounts do not agree, find out why.
- Directors' pay. If you pay yourself mostly by dividend, your operating profit looks better than a business paying a full market salary for your role. Remember that when comparing yourself to other agencies or thinking about a sale.
- One offs. A big perm fee, a write off of a bad debt or a recruitment campaign can make one month look unusually good or bad. Read the trend over three to six months.
Five questions to ask every month
- Is net fee income up or down on last month and the same month last year?
- Has contract gross margin moved, and if so, why?
- Which consultants and which clients earned the most, and the least?
- Are overheads growing faster than net fee income?
- Is the cash in the bank moving in the same direction as profit? If not, read our guide on the cash gap.
If your current accountant cannot answer those five questions every month, that is the gap we built Harwood to fill.
This guide is general information, not advice on your specific circumstances. Accounting treatment depends on your contracts and your accounting framework.