When 61 recruitment agencies went bust in 2010, with hundreds of millions trapped in overdue client payments, it was a powerful warning of the way that a sluggish back office can have a knock-on effect across the whole business. Those most at risk often display all the outward signs of a healthy, efficient business, but are unaware of looming threats on the horizon.
Late-paying customers are not just stunting agency growth and harming cash-flow, but dramatically pushing up their debts, by driving many to use overdraft facilities to pay temp wages and invoice factoring companies.
Almost every agency that went bankrupt in the first quarter of 2011, had used invoice factoring companies to claw back customer debt and speed up cash-flow, a dangerous strategy that exposes them to the risk of sudden cash-flow setbacks, such as big client losses.
But Aged Debt and the associated risk of bankruptcy is not the only way that hidden problems with back-office processes can have a massive impact across the whole recruitment business.
Inefficiency within the back office leads to a vicious circle; one process that doesn’t work well can impact all the others, producing a “domino effect” that can devastate the whole business. It can impact upon Mergers & Acquisitions activity, drive up admin costs, and hurt cash-flow, growth and business valuation.
In other words, an inefficient back office can undermine all the great work done at the sales and operations end of the business.
The Red Tape Risks
The current economic climate demands that recruiters, particularly SME’s, eliminate unnecessary cost and inefficiency, streamlining and doing more with less. Yet many recruitment businesses continue to rely on manual, paper-based timesheet systems, which generate a mountain of red-tape, are heavily labour-intensive and run at a slow tempo.
Manual timesheets are often processed on a best-effort basis, generating a treadmill of continual processing where the end is never reached until the close of the month.
These archaic methods merely reinforce the traditional, panicked, end-of-month “invoice run” from the agency, leading to a single payment run for last all of month’s bills, from the client. Batch-processing mountains of paper timesheets to meet end-of-month closing deadlines, is not only prohibitively costly, and massively time-consuming, but renders the business vulnerable to human error.
Speed up cash flow
Outsourcing to software solutions automates weekly timesheet processing and, when this is integrated with accounting and finance packages it dramatically raises the tempo of invoicing by enabling weekly invoices to be raised. This helps ensure that payment is 30 days from invoice, rather than at end-of-month after each invoices is generated. This also helps avert the drama of batch processing mountains of paper timesheets driven by month end closing deadlines.
The Hidden Debt Mountain
Managing Aged Debt is one of the biggest problems a recruitment agency faces, as our economy continues to totter. With many UK SME’s at risk of bankruptcy, recruitment agencies need to balance the understandable desire to avoid badgering customers for payment, with the knowledge that the longer a payment is delayed, the greater the risk that the client will go bust and leave the agency heavily in debt. An estimated £64 billion of Britain’s annual SME income is currently tied up in Aged Debt, further amplifying the risk of bankruptcy among agency customers.
It is common for large businesses in the public and private sectors to pay on 60, 90 even 180 days. This can be hard to swallow especially if you are faced with paying temps or contractors on a monthly payment run, but may not see the remittance from the client for another five. Carrying large amounts of Aged Debt because of scenarios like this undermine an agency’s financial position. Such circumstances increase the threshold at where working capital becomes positive or force you to service the debt on bank credit facilities.
Automated timesheets allow processing to be carried out with a few clicks of a mouse enabling easy weekly invoicing. Agreeing with clients to settle on 30 days from invoice rather than on end-of-month payment runs result in a much improved cash flow situation. If we accept that longer payment terms may be inescapable for some customers, speeding up the cash flow by weekly invoice and payment for others helps to minimise Aged Debt and any negative indications for the health of the business.
The Secret Key to Boosting Business Value
M&A activity is an increasingly popular trend. The headline objective of consolidation is often to become more efficient, realising economy of scale, with a merged business retaining or increasing market share from a reduced the cost base. Importantly, an efficient back office enables headcount to be reviewed. For some, onward sale may be on the horizon and business owners need to carefully consider their exit strategy if sale value is to be maximised.
But poor cash-flow and high admin costs, driven by inefficient back-office processes, can harm share-price. Generally speaking, the valuation method of a public company is linked to the P/E (Price/Earnings) ratio of its shares. So for example if an agency was valued at 5x net profit every £1 it can remove from the bottom line is an extra £5 it can add to the value of the business.
An efficient back office can facilitates cost-cutting and downsizing, by enabling an agency to cut admin staff.
Because your agency value only provides a snapshot of your actual value at any one time, a fast, efficient back office operation, spearheaded by automated timesheets which boost cash flow, adds value to the business for prospective suitors or buyers undertaking due diligence.
The Domino Effect
Critically, by reducing the amount of business value caught up in overdue payments, it gives potential buyers a far more accurate picture of your organisation’s financial health, putting businesses in a stronger negotiating position, whether they plan to merge or sell.
Many recruiters now farm out vital back-office functions to “intelligent” timesheet-management software that automates everything from faxing or signing documents, to financial analytics, document management, gross margin reporting, and notifying clients of late payments. The latest models can turn timesheets into invoices in just sixty seconds.
Just as the effects of inefficient manual admin methods can be felt across the business, a fast-moving and efficient admin system can trigger myriad improvements elsewhere in the organisation, often in ways that are not immediately obvious.
In the current climate, it is critical that recruitment agencies begin to look at their businesses as an ecosystem in which everything is connected, and what happens in one area, affects everything else.
