Every contract recruitment business has the same structural problem. You pay temps weekly. Clients pay you on 30, 45 or 60 day terms, and some pay late. In between, your agency is lending its clients money, interest free, every single week. That loan never gets repaid while the contract book keeps running. It just rolls forward.
How big is your gap?
Take a simple example. An agency runs 20 temps, each costing £600 a week in pay and employer costs, so £12,000 a week leaves the bank. Temps are paid five days after the week ends. The client is invoiced three days after the week ends, on 30 day terms, and pays a week late on average.
| Step | Days after week end |
|---|---|
| Temps paid | 5 |
| Client invoiced | 3 |
| Invoice due (30 day terms) | 33 |
| Client actually pays (7 days late) | 40 |
| Gap between paying out and being paid | 35 |
35 days is five weeks. Five weeks of £12,000 is £60,000 of cash permanently tied up in the contract book, before VAT. Move that client to 60 day terms and the figure becomes about £111,000. Run your own numbers in the cash gap calculator.
Why growth makes it worse
The gap scales with the contract book. Every new temp adds a weekly cost now and a receipt five or more weeks later. So the months you win the most business are the months your bank balance falls fastest. This is how agencies with full order books and healthy margins end up unable to make a Friday pay run.
Six levers that close the gap
1. Invoice faster
Every day between the end of the week and the invoice going out adds a day to the gap. Approve timesheets on Monday, invoice on Monday, and make sure the invoice matches what the client's purchase order system expects, so it is not rejected and resubmitted.
2. Negotiate terms before you start, not after
Payment terms are easiest to agree at the start of a relationship. Larger clients will push for 60 days or more. Price that in, or hold the line. Fifteen extra days on terms ties up an extra two weeks of contractor pay on every placement with that client.
3. Run credit control like a process
Chase before the due date, not after. A polite reminder a few days before an invoice falls due, a call on the day it is overdue, and a named contact in each client's accounts team will recover more days than any amount of shouting at day 60.
4. Use invoice finance deliberately
Factoring and invoice discounting advance most of each invoice when you raise it, which closes most of the gap. They cost money, they can be hard to exit, and the funder's balance has to be reconciled to your accounts every month. Used deliberately, they are the standard tool for funding a growing contract book. Used by default, they quietly eat margin.
5. Watch the VAT timing
On the standard VAT basis you owe HMRC the VAT on invoices you have issued, whether or not the client has paid. Your VAT return is due one month and seven days after the end of each quarter, so a slow paying client can mean paying VAT on money you have not received. The VAT cash accounting scheme, available up to £1.35 million of taxable turnover, means you account for VAT when you are paid instead. It is worth checking whether it suits you.
6. Forecast it, week by week
A monthly forecast is too blunt for a weekly payroll business. A rolling 13 week forecast, built from your live contract book and each client's real payment habits, shows the pinch point weeks before it arrives. That is when you still have options: delay a hire, bring forward a perm invoice, extend a facility, or have a conversation with a slow payer.
Don't forget the big bills
Corporation tax for most smaller companies is due nine months and one day after the year end. Commission runs, bonuses and quarter end VAT all land in specific weeks. A forecast that knows they are coming stops a good quarter turning into a tight one.
Our cash flow forecasting service builds and maintains that 13 week view for you, with a short written note on what it means. It is included quarterly in our Scale tier. See how it works.
This guide is general information, not advice on your specific circumstances, on VAT schemes or on any particular finance product.