Wednesday - 19 November 2008
Features
Although your profits may look fine, don’t take your eye off the cash flow ball, as the knock-on effects from clients’ problems could hit where it hurts. Roisin Woolnough investigates
Anyone who works in or does business with the construction industry is feeling the pinch at the moment. The much talked about credit crunch is sorely felt in this sector, and those affected include the recruitment agencies supplying the workers.
"Right now most of the credit crunch problems are in construction," says Brian Pursey, managing director at business services provider, Oriel. "As a result, some construction companies are not able to pay their invoices and I certainly know of one agency in the construction industry that has folded because of a large bad debt and others that are having problems."
And it's not just the smaller construction companies and agencies that are having problems. According to The Daily Mail, Barratt Homes decided to take a credit break in June and not pay all of its bills that month because of financial issues. This kind of action can have a pretty big impact on the cash flow of recruitment agencies, who still need to meet their own payroll demands.
Recruitment agencies working in sectors as yet relatively unscathed by the credit crunch shouldn't feel too smug that they have escaped the downturn. Pursey thinks it is only a matter of time before the effects of the economic downturn are felt on a wider scale and more and more companies take longer to pay bills because of cash flow problems.
"No-one is immune, even if they think they are at the moment," he says. "It will go across most industry sectors, probably peaking after Christmas, and then getting better. There will be a lot of insolvencies and a lot of bad debt going around, and companies will be taking longer to pay their bills."
However, Ian Humphrey, managing director of Back Office Support Services, argues that credit problems are already making their presence known across the spectrum of UK industries. "We're seeing no particular trends; there's a general tightening of belts across the economy," he says.
Humphrey said that his business was seeing "twice as many" client companies of recruitment agencies go out of business this year than at the same time last year.
The increasing numbers of client companies that experience serious cash flow problems will put a big squeeze on recruitment agencies' cash flow. Clients may start paying late or, in a worse case scenario, defaulting on payment altogether. The problem is even greater if it's not just one client paying late on one occasion, but all or most of your clients paying late each time.
"We're seeing more and more excuses," says Guy Jones, national recruitment financial specialist with Bibby Financial Services.
"End clients are taking much longer to pay payroll and agency invoices, due to the current global credit crunch," says John Grice, operations director at New Millennia Payroll Services. "More and more companies are requesting to pay at the end of the month following rather than within the 30-day credit limit, to relieve the pressure of their suppliers not paying them. This has led to agencies or payroll companies having to be much tougher in the credit control area and keep a tight control on collections."
Robust procedures
Given these financial constraints, it is very important that recruitment agencies have robust and closely managed credit control procedures in place so that any client cash flow problems don't cause internal meltdown.
Many agencies hand over responsibility to back office service providers that can manage credit control for them along with other services such as payroll, collection and invoicing. Not all services are equally comprehensive, nor are levels of protection equal, so it's important to know what you're looking for and to shop around.
At Back Office Support Services, for instance, credit control staff are recruited with the aid of psychometric tests to ensure that those entrusted with ensuring their clients' invoices are paid promptly. "There is a certain mentality for a good credit controller," says Humphrey.
Bibby's Jones says his company has found that a telephone-based system of working with agencies' debtors is most effective. Letters tend to be ignored. "Five days after an invoice is issued, we call the [agencies'] clients to make sure that it has been received, and that everyone agrees with what is on there," Jones says.
A cornerstone of robust credit control, particularly given the current economic climate, is making sure your debt is credit insured, according to Pursey. He recommends that agencies get a credit insurance broker to identify the best product and to do it as soon as possible because premiums are on the rise. "It is essential that agencies take this protection. But because of what is happening rates and terms are hardening and the extent of cover is reducing."
Agencies — or the back office providers serving them — need to look at how they chase payment and how long this cycle takes. The longer payment is withheld, the less interest an agency makes on that money. And no one wants to incur costs or to become unable to meet bills or payroll demands because of waiting for invoices to be paid.
To understand your agency's current situation, establish how long clients are taking to pay their bills and how their current performance compares to a year ago. Even for agencies working with back office service providers, it is still wise to be fully aware of the current state of affairs, just what is happening with your clients and the effect this is having on your own cash flow.
Charlie Bevan-Dimmer, founder and director of office staff providers i2i Recruitment in Cheltenham, contracts with Oriel to provide back office services. Right now their services are even more essential than usual to the well-being of her business, Bevan-Dimmer says: "It's particularly important right now as everyone is watching their pennies and people are holding on to their invoices."
What it is crucial is that all agencies now take a good look at their payment systems and how well cash is flowing through. That is what Lisa Dendle, managing director at Surrey-based recruitment services provider, Walker Dendle, has done. "I've really taken the opportunity to review our credit systems in consultation with our bank," she says. "I've looked at invoicing, purchasing and credit collection as I think it's vital for companies to do this to see themselves through challenging times ahead."
Dendle decided to act when her agency's average debtor day started to creep over the 28 days normally maintained. "Cash flow can so quickly dry up in a recruitment business if the money is not coming in, so this is the time to review how and when you collect your money."
One solution Walker Dendle has adopted to encourage speedier payment is to offer prompt payment discounts, an initiative that has proved popular with clients.
Ultimately, success in keeping a continual, smooth flow of money starts with one crucial step: a thorough credit check before ever taking on a client, says Back Office Support Services' Humphrey.
A poor credit history is likely to lead to more of the same in the future, he warns, adding that a prevailing sales mentality and the aim of bringing on board more business can get recruiters into trouble. "Salespeople don't like saying 'no' to people," says Humphrey. "They must resist the urge to say 'business at any price'."
DeeDee Doke also contributed to this article
Top tips to keep an eye on cash flow
• Conduct thorough credit checks of potential clients
• Don't take businesses with poor credit histories on as clients
• Make sure your debt is credit insured
• Look at your chasing cycle regarding payment
• Consider credit controls such as 100% financing against invoices, purchasing and credit services and payroll
Working with a back office service provider
A back office provider can offer invaluable assistance, but recruiters need to take on board the same advice they give their clients about agency selection: be wary of going for the provider that promises the cheapest deal.
Unfortunately, many agencies make the same mistake as their clients by opting for the cheaper choice, according to Grice.
"Agencies seem to seek a back office supplier with the cheapest rate," he says. "This type of deal is normally a 'retention and recourse' deal. This system means that if the invoice is in a disapproved state, the margin is taken back from the agency, and if the account goes bust there is normally an excess charge. In today's climate this could have serious effects on cash flow."
Instead, Grice recommends using a company that provides non-recourse insurance so that if an account is late, becomes disapproved or goes bust, there is no recourse back to the agency.
Fighting the squeeze
Published: 09 July 2008
"Right now most of the credit crunch problems are in construction," says Brian Pursey, managing director at business services provider, Oriel. "As a result, some construction companies are not able to pay their invoices and I certainly know of one agency in the construction industry that has folded because of a large bad debt and others that are having problems."
And it's not just the smaller construction companies and agencies that are having problems. According to The Daily Mail, Barratt Homes decided to take a credit break in June and not pay all of its bills that month because of financial issues. This kind of action can have a pretty big impact on the cash flow of recruitment agencies, who still need to meet their own payroll demands.
Recruitment agencies working in sectors as yet relatively unscathed by the credit crunch shouldn't feel too smug that they have escaped the downturn. Pursey thinks it is only a matter of time before the effects of the economic downturn are felt on a wider scale and more and more companies take longer to pay bills because of cash flow problems.
"No-one is immune, even if they think they are at the moment," he says. "It will go across most industry sectors, probably peaking after Christmas, and then getting better. There will be a lot of insolvencies and a lot of bad debt going around, and companies will be taking longer to pay their bills."
However, Ian Humphrey, managing director of Back Office Support Services, argues that credit problems are already making their presence known across the spectrum of UK industries. "We're seeing no particular trends; there's a general tightening of belts across the economy," he says.
Humphrey said that his business was seeing "twice as many" client companies of recruitment agencies go out of business this year than at the same time last year.
The increasing numbers of client companies that experience serious cash flow problems will put a big squeeze on recruitment agencies' cash flow. Clients may start paying late or, in a worse case scenario, defaulting on payment altogether. The problem is even greater if it's not just one client paying late on one occasion, but all or most of your clients paying late each time.
"We're seeing more and more excuses," says Guy Jones, national recruitment financial specialist with Bibby Financial Services.
"End clients are taking much longer to pay payroll and agency invoices, due to the current global credit crunch," says John Grice, operations director at New Millennia Payroll Services. "More and more companies are requesting to pay at the end of the month following rather than within the 30-day credit limit, to relieve the pressure of their suppliers not paying them. This has led to agencies or payroll companies having to be much tougher in the credit control area and keep a tight control on collections."
Robust procedures
Given these financial constraints, it is very important that recruitment agencies have robust and closely managed credit control procedures in place so that any client cash flow problems don't cause internal meltdown.
Many agencies hand over responsibility to back office service providers that can manage credit control for them along with other services such as payroll, collection and invoicing. Not all services are equally comprehensive, nor are levels of protection equal, so it's important to know what you're looking for and to shop around.
At Back Office Support Services, for instance, credit control staff are recruited with the aid of psychometric tests to ensure that those entrusted with ensuring their clients' invoices are paid promptly. "There is a certain mentality for a good credit controller," says Humphrey.
Bibby's Jones says his company has found that a telephone-based system of working with agencies' debtors is most effective. Letters tend to be ignored. "Five days after an invoice is issued, we call the [agencies'] clients to make sure that it has been received, and that everyone agrees with what is on there," Jones says.
A cornerstone of robust credit control, particularly given the current economic climate, is making sure your debt is credit insured, according to Pursey. He recommends that agencies get a credit insurance broker to identify the best product and to do it as soon as possible because premiums are on the rise. "It is essential that agencies take this protection. But because of what is happening rates and terms are hardening and the extent of cover is reducing."
Agencies — or the back office providers serving them — need to look at how they chase payment and how long this cycle takes. The longer payment is withheld, the less interest an agency makes on that money. And no one wants to incur costs or to become unable to meet bills or payroll demands because of waiting for invoices to be paid.
To understand your agency's current situation, establish how long clients are taking to pay their bills and how their current performance compares to a year ago. Even for agencies working with back office service providers, it is still wise to be fully aware of the current state of affairs, just what is happening with your clients and the effect this is having on your own cash flow.
Charlie Bevan-Dimmer, founder and director of office staff providers i2i Recruitment in Cheltenham, contracts with Oriel to provide back office services. Right now their services are even more essential than usual to the well-being of her business, Bevan-Dimmer says: "It's particularly important right now as everyone is watching their pennies and people are holding on to their invoices."
What it is crucial is that all agencies now take a good look at their payment systems and how well cash is flowing through. That is what Lisa Dendle, managing director at Surrey-based recruitment services provider, Walker Dendle, has done. "I've really taken the opportunity to review our credit systems in consultation with our bank," she says. "I've looked at invoicing, purchasing and credit collection as I think it's vital for companies to do this to see themselves through challenging times ahead."
Dendle decided to act when her agency's average debtor day started to creep over the 28 days normally maintained. "Cash flow can so quickly dry up in a recruitment business if the money is not coming in, so this is the time to review how and when you collect your money."
One solution Walker Dendle has adopted to encourage speedier payment is to offer prompt payment discounts, an initiative that has proved popular with clients.
Ultimately, success in keeping a continual, smooth flow of money starts with one crucial step: a thorough credit check before ever taking on a client, says Back Office Support Services' Humphrey.
A poor credit history is likely to lead to more of the same in the future, he warns, adding that a prevailing sales mentality and the aim of bringing on board more business can get recruiters into trouble. "Salespeople don't like saying 'no' to people," says Humphrey. "They must resist the urge to say 'business at any price'."
DeeDee Doke also contributed to this article
Top tips to keep an eye on cash flow
• Conduct thorough credit checks of potential clients
• Don't take businesses with poor credit histories on as clients
• Make sure your debt is credit insured
• Look at your chasing cycle regarding payment
• Consider credit controls such as 100% financing against invoices, purchasing and credit services and payroll
Working with a back office service provider
A back office provider can offer invaluable assistance, but recruiters need to take on board the same advice they give their clients about agency selection: be wary of going for the provider that promises the cheapest deal.
Unfortunately, many agencies make the same mistake as their clients by opting for the cheaper choice, according to Grice.
"Agencies seem to seek a back office supplier with the cheapest rate," he says. "This type of deal is normally a 'retention and recourse' deal. This system means that if the invoice is in a disapproved state, the margin is taken back from the agency, and if the account goes bust there is normally an excess charge. In today's climate this could have serious effects on cash flow."
Instead, Grice recommends using a company that provides non-recourse insurance so that if an account is late, becomes disapproved or goes bust, there is no recourse back to the agency.
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