Recruitment · 🇬🇧 United KingdomScenario
Funding the gap between weekly contractor pay and monthly billing
The funding gap on a contract desk is closed by shortening the cycle rather than by chasing the debt: a weekly timesheet cut-off, weekly invoicing in arrears, and a working capital figure modelled per placement before the placement is made. This is an illustrative example set in a UK agency running a permanent book and a contract book side by side.
Scenario — an illustrative example of how Salt approaches this problem. Not a description of a specific client engagement.
The business shape it describes: UK recruitment agency, permanent and contract placements.
- Scenario covers
- Contractor payroll, client invoicing and working capital modelling
- Software it assumes
- Xero · Dext
- Jurisdiction
- United Kingdom
- Sector
- Recruitment
The setup
- Contractors are paid weekly. Clients are invoiced monthly in arrears on thirty-day terms.
- The agency is funding roughly seven weeks of contractor cost on every placement and has never put a figure on it.
- Growth makes cash worse. Each new contract placement consumes working capital before it returns any.
What usually turns out to be wrong
- VAT makes the gap larger than the pay itself. An employment business supplying temporary workers accounts for VAT on the full amount invoiced, including the element funding the worker's pay, and that VAT falls due by reference to the invoice rather than to the client's payment.
- Timesheet approval is the real bottleneck. An unapproved timesheet cannot be invoiced, so a two-day approval delay is a two-day funding delay across every worker in the chain.
- Where an engagement is inside the off-payroll working rules and the agency is the fee-payer, the agency operates PAYE and bears employer National Insurance on the deemed payment. That cost is frequently missing from the margin calculation.
- Holiday pay is a cost of the assignment whether it is rolled up or accrued. For leave years beginning on or after 1 April 2024, entitlement for irregular-hours and part-year workers accrues at 12.07% of hours worked, and rolled-up holiday pay is permitted for those workers.
- Permanent placement fees convert to cash quickly and are subsidising the contract book. Nobody has separated the two, so nobody can see it.
- After twelve weeks in the same role, the Agency Workers Regulations 2010 give the worker equal treatment on basic terms, which can change the pay rate mid-assignment.
How this would be worked
- Working capital per placement would be modelled first: pay rate, employer costs, VAT timing, days to invoice and days to collect, producing a single cash figure the agency funds for each new contractor.
- The timesheet cut-off would move to a fixed weekly deadline with automatic escalation to the client manager, because approval speed is the only part of the cycle entirely within the agency's control.
- Invoicing would move to weekly in arrears, matching the pay cycle, so the funding gap shortens from weeks to days on every client that accepts it.
- Payroll would run under RTI with a Full Payment Submission sent to HMRC on or before each payment date, with auto-enrolment assessment and pension contributions handled in the same run.
- Status determination statements under the off-payroll rules would be matched to each assignment, so the fee-payer position and the employer National Insurance cost are known before a margin is quoted.
- Where umbrella companies sit in the chain, PAYE responsibility would be confirmed rather than assumed. This has changed recently and the answer is no longer automatically the umbrella.
- Permanent and contract would be reported as separate profit centres, each carrying its own direct cost and its own share of overhead.
Why we'd be the right fit
- A contract desk's cash problem presents as a collections problem and is a timing problem. It can only be fixed by someone holding the payroll cycle and the invoicing cycle at once, rather than in two separate teams.
- Separating permanent from contract profitability is the uncomfortable part, because it usually shows one revenue line carrying the other.
- Payroll is prepared and submitted on the agency's behalf as its agent. Status determinations under the off-payroll rules are decisions for the end client and the agency, and Salt does not make them.
What the business would be able to do
- The agency would be able to state the cash cost of the next placement before it makes it.
- Invoicing would follow the pay run by days rather than weeks, and any delay that remains would be attributable to a named client rather than to the process.
- Permanent and contract would each show their own margin, so a decision to grow one rather than the other is made on figures.
What we'd flag
Clients do not all accept weekly invoicing. Some move to fortnightly, some do not move at all, and a client that refuses is a client whose placements carry a higher funding cost. That is a pricing conversation rather than a credit control one.
Answers
Funding the gap between weekly contractor pay and monthly billing
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