Recruitment agency fees, whether they are permanent or contract/temporary placements, are always based on the profit generated. These fees will often fall into two categories, a mark-up percentage or a gross profit percentage. However, many recruiters ask me during our initial consultation call “Stewart, mark-up vs gross profit in recruitment- what’s the difference?”.
WHAT DOES MARK-UP MEAN?
Mark-up is a calculation of the profit on the amount the candidate is paid. If a permanent placement is made, the recruiters’ fee will often be a percentage of the candidate’s annual salary which is a mark-up calculation. Some PSL agreements may also work on a mark-up profit margin basis where the client dictates the candidates’ pay rates and therefore the rates are based on this.
WHAT IS GROSS PROFIT?
Gross profit is a calculation of the profit on the amount the client is charged and is often seen on contract placements where the client has a charge rate they are willing to pay, and the agency will calculate their fee based on this rate. Once they know the profit they can generate, they will know the amount needed to find a candidate to fill that placement and receive that margin.
Understanding the difference between mark-up and gross profit is vital for any agency owner to ensure you are making a good profit margin, and, in some circumstances, this can have an impact on cashflow.
Any set of management accounts produced for a recruitment agency making contract/temporary placements will show the gross profit percentage (GP%) which will be the profit generated divided by the contract turnover.
However, if your recruitment agency is working on a mark-mp model, you will notice that this number is much lower than the mark-up percentage you are used to. For example, a mark-up percentage of 20% would equate to a 16.66% gross profit, and a mark-up percentage of 10% would equate to a 9.09% Gross Profit.
HOW DOES MARK-UP VS GROSS PROFIT IN RECRUITMENT AFFECT INVOICE FINANCE?
If your agency is receiving funding from an invoice finance company and they are lending 90% of the client invoice amount, you must work out your margins based on a gross profit model and keep them above 10%. If your agency uses a 10% mark-up margin rate, this equates to 9.09% GP, this means that the funding provider will not be able to provide the full funding against those placements and your agency will need to use its own funds to pay the candidates.
The same scenario may also be the case if your agency has a credit protection policy which only covers 90% of an invoice amount which means that if you are below a 10% gross profit margin then you won’t be fully protected on those invoices.
HOW CAN WE HELP YOU?
MAYACHI Ltd has many years’ experience of working with recruitment agencies making contract/temporary placements and ensuring they understand the difference between mark-up and Gross Profit margins. We also analyse your agencies’ risk factors on placements which may fall below the funding or credit protection limits so the Directors know what may not be covered.
If you’re reading this and realising that the distinction between Gross Profit and Mark-Up is being miscalculated and want to understand how to improve your business performance, remember our consultation call is free and we can discuss this and anything else finance-related that might be affecting your business. You just need to book here.
