Let us face it the success of your start-up agency will be measured in two key ways at the end of your first year: The number of bookings you are making (People Planning) and the balance in your bank account.
The challenge you face is maximising the net profit for however many shifts you supply and one of the major drains on this profit is the cost of paying staff often before the customer pays you. Cost of paying staff? Surely that is their (net) pay plus company NI, statutory company Pension contributions, expenses and the like?
Bottom Line vs Headline Rates
In your company accounts bottom line / end of year, the cost of paying staff is the cost of the (optional) accountant who calculates their wages and the cost of borrowing any money (you don’t have) to pay them before the invoices are paid.
You should work out this bottom line cost when considering how to finance the bridge between payroll going out and invoices being paid. Finance companies, umbrella companies and the like are very good at headline rates. Headline rates are often calculated on the total amount borrowed rather than the day by day needs. When you sit down and calculate how much you actually pay them, an approved bank overdraft/loan is often significantly cheaper as you are only paying for each day you need to borrow and there are around 30 of those in a month.
Simple Example 1:
Your total wage bill for a month is £10,000.
A finance arrangement charges a headline rate of 2%. So before they pay you they pocket £200 per month. Over 12 months this is £2,400. To calculate the REAL interest rate or annual percentage rate (known as APR) you simply take the total annual charge and the average annual loan and this works out at a whopping 24%.
Simple Example 2:
Your total wage bill for a month is £10,000 (the same).
You arrange either a secured bank loan (they have the right to sell your house if you don’t pay it back) or an unsecured loan. Banks normally cream £100 or so off the top as an arrangement fee. They then charge you 7-10% on a secured overdraft or 20% on an unsecured one (you need to shop around the banks for the best deal). So you wage bill is £10,000 for the month, Each week your payroll is £2,500 (ish) and your customers pay you 2 weeks after invoice. Since you run your payroll and invoice at the same time (you can run invoices midway through a week and payroll at the end if you want). You need to borrow two weeks of pay. So that is £5000. So you have borrowed this for a year and you are paying either 10% for a secured overdraft and that comes to £500 or 20% unsecured. So that comes to £1000. This is nearly £2000 less than the finance arrangement on a secured overdraft or £1000 in your pocket on an unsecured overdraft.
It gets better: If your net margin (invoice value minus payroll, payroll costs and other overheads) is 10%. This means (for example 2) you have £1000 profit, so actually the following month you only need to borrow £4000. Your overdraft interest is now only £400 secured or £800 unsecured. The month after that £300 and £600. After about 6 months you should not need an overdraft. You borrowing costs may be as low as £200 secured or £500 unsecured. Of course you may want to grow a bit, but you can double (or more) your staff and still stay within the overdraft agreement.
Small print when dealing with Neutral Vendors.
You can legally charge them interest after 2 weeks and any T&Cs you sign cannot invalidate this legal right You should point this out to any intermediary neutral vendor when signing a contract with them which states any variable period in excess if 14 days. If you don’t: it doesn’t matter (it’s a legal right as a small company and they know that). If they argue then you trump that taking it up with the organisation they are contracted to supply that they (the Neutral Vendor) are operating outside the law. Always remember that you have the staff they need.
Millage may vary
The figures in this article are examples only. Interest rates and charges do vary with time and from bank to bank and across payroll and factoring services.
We hope this article helps you start a successful agency. Our software can help you keep your costs at a minimum once free PAYE software is not an option and Invoice and Pay calculations are taking you a lot of time. Or we can help you when messaging employees and customers and compliance checking becomes time consuming.