How is it exactly Umbrella companies generate a profit?

How is it exactly Umbrella companies generate a...

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When trawling through the internet researching Umbrella companies I was shocked to find so many with such low weekly costs (£9.94 being my lowest find thus far!) And I am well aware that when things look too good to be true, more often than not – they are! Such as some benefits that ordinarily larger (and more expensive) companies provide with their service will be absent.

But that brings me to my question, how exactly do Umbrella companies make their profit? I understand, obviously, that an umbrella company retains a margin of an employee’s generated revenue (?) – which as well as covering admin costs also bumps up their overall profit...but that’s as far as my understanding of how they create any profit goes.

I don’t know if I am just not understanding how umbrella companies work or I am just looking at it from the completely wrong perspective (I am a Law student, hoping (being the key word here) to write a decent comparative essay on umbrella and limited companies) but I just cannot see how Umbrella companies can gain any notable profit especially when there are such low costing ones out there!

Any information you can provide would be a great help to me! Because I am honestly up to my eyes balls in reasons to go for an umbrella company – just next to nothing on the benefits to the actual umbrella company itself!

Replies (6)

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By thisistibi
05th Sep 2012 13:05

Umbrella companies

I'm not sure there's much money to be had making umbrellas anymore....

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By neileg
05th Sep 2012 13:08

Mmm?

£10 per month for doing nothing sounds OK to me.

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By ireallyshouldknowthisbut
05th Sep 2012 13:56

.

Sansa,

£9.92 a week is not "nothing". Thats £500 a year. Now if you run a fully automated system with the client keying in all the data, employ some low skilled, low paid workers to punch a few buttons for you, close your eyes and ignore any hint of quality, and whilst the customer will probably get a lot of shoddy work done, you dont give a stuff about that in this sort of set up and you can probably still make £200 out of it PA out of each client. Perhaps more with some upsell.

Its a perfectly valid business strategy, the client of course doesn't matter in this sort of set up, its all about taking their cash (even if its only a little bit). You expect a huge churn rate going for a low quality/high volume set up, and deal with that with a high entry/exit cost to try and stop them leaking away hidden in the T&C's.

So that's how they do it!

Or you can run a limited company for the client as a proper business. This mean higher outlay in terms of bean counter costs, but much less tax. For example a typical £100k PA consultant will make £3-4k just on the flat rate VAT scheme in the first year which even if you are paying £1200-£1500 accounting fees for a full package pays for itself.

Bet you cant guess which we do!

 

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By Ken Howard
05th Sep 2012 14:07

Compare with Tesco

Tesco may well only make a few pence on a tin of beans, but they still do it simply because they sell huge quantities with very low "overheads per item sold".

Umbrellas will no doubt apply the same "pile it high and sell it cheap" logic.  The key will be systemisation and keeping costs low.  They won't need qualified staff - if it's systemised, all they need is relatively low paid, low skilled, call centre workers and admin/keying in staff.  Even better, as mentioned above, get the clients to do their own data entry into a website or online portal.  A bit of time to set up each new client, but money for nothing once up and running.

I'm sure there are also opportunities for cross selling other complimentary services and/or selling client lists to other firms, for things like buisiness insurance, life insurance, sickness insurance, recruitment agencies, banks and credit cards, mis-selling claims companies etc - wouldn't be difficult to get another £50/£100 per year out of commissions from complimentary services.

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By paymatters
06th Sep 2012 08:58

Weekly Cost

Often the weekly cost (normally called margin due to VAT reasons) is the net cost to contractor/employee ie the amount that the margin affects their net take home pay by. So if someone quotes £10 then that could actually be a £20 gross margin. The gross margin has employee NIC and PAYE relief and also reduces the employers NIC deduction from commission payable so there is quite a big difference between gross and net margin especially if someone is a higher rate tax payer.

An umbrella company can also claim back VAT on the expenses that their employees claim for.

 

See: http://www.paymatters.co.uk/costs-of-joining-an-umbrella-company.html

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Man of Kent
By Kent accountant
06th Sep 2012 10:07

£20 a month per 'employee'

On a 1,000 employees that soon adds up.

Agree with paymatters.

VAT recovered on expenses is where profit is made in addition to a relatively small admin charge of say £20-£30 a month.

If an umbrella succeeds in landing a big contract with an agency providing labour for say the health service, couriers, construction, then they are on to a big winner.

£20k+ a month net profit is achievable.

You need the contacts to achieve this though.

 

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