Whenever a recruiter makes a placement, whether this is a permanent, temporary or contract position, the big question is “how much profit will I make on this candidate”. However, understanding how the profit is calculated is important to ensure that the correct rates are charged to meet the recruiter’s expectations and targets and, in some cases, comply with the contracted terms with a client. Also, it is important for an agency director to protect the agency in terms of funding, insurance and company value by reflecting the correct profit margins in the company figures.
Below are the differences between a mark-up margin and a gross profit margin:-
- What Is A Mark-up Profit Margin?
A Mark-Up Profit Margin is where the profit on a placement is calculated based on the candidates pay rate. In order to calculate the mark-up percentage, you would divide the profit margin by the candidates pay rate. This type of calculation is often used to calculate the fees on permanent placements as it is based on a percentage rate of the candidate’s annual salary. However, clients who require temporary or contract workers will often specify in their contracts that the profit margins are based on a percentage of the candidate’s rate.
- What Is A Gross Profit Margin?
A Gross Profit Margin is where the profit on a placement is calculated based on the clients charge rate. In order to calculate the gross profit margin percentage, you would divide the profit margin by the clients charge rate. This type of calculation is often used to calculate the fees on contract placements as it is a true reflection of the profit generated on each hour/day worked by the client.
Recruitment agencies need to ensure their consultants know the difference between the two types of margin calculations because:-
- It Could Affect The Invoice Finance Funding
Invoice finance companies always provide funding based on the value of a client invoice to an agreed prepayment percentage. The prepayment percentage is normally between 85-90% on temporary or contract placements which means you would need to ensure that your gross margin percentages are above 15-10% or you may need to cover the difference yourself. If your prepayment percentage is 85% and you do a deal with a 15% mark-up instead of a 15% gross margin, the actual gross margin is 13% and you would need to fund the other 2% of the invoice value with funds from the business.
- It Could Affect The Pay-out On A Credit Insurance Claim
Credit insurance policies will often cover the debtor value in the same way that invoice finance companies provide funding based on a percentage of the client invoice value (i.e. 90% of the invoice value). Therefore, it is important to ensure that any placement that is made is based on a gross margin percentage that is higher than the insured amount or you may be out of pocket should a claim need to be made.
- It Could Make Your Annual Figures Look Lower
When accountants produce figures for the recruitment agency to monitor their turnover and profitability, they will always show the company’s gross margin as a percentage instead of a mark-up. Using the gross margin gives a better reflection of the profits generated against the turnover and gives any prospective buyer an indication of the profits that could be generated if the turnover increased.
TBOS has many years’ experience of helping the recruiters and directors within their agencies to understand the difference between a mark-up and gross margin profit. All management reporting that we provide reflects the gross profit margins to ensure that the directors are fully aware of their turnover and profitability, and how their margins affect this. TBOS also works with the agencies who are starting to make placements into the contract market to understand the difference between mark-up and gross margin so they ensure they fit within the requirements of their invoice finance arrangements.
For more information on how TBOS can help you with your back office and accounting needs, please contact our office.