Reaping the rewards of sound financial governance

Published: June 2009

The biggest test for recruiters now is demonstrating the working capital they need to reassure clients says Relay’s money man

Today's extraordinary trading conditions have brought about many reversals and changed working arrangements.  Among them are seismic shifts in the supplier/client relationship that have seen one of the hardest hit sectors, recruitment, put under additional pressure.

Whereas it is customary for service providers to perform credit checks on potential clients to establish their ability and willingness to pay, now those customersare seeking reassurance too.  Increasingly, proof of recruiters' financial viability and working capital - invariably in the form of full audited accounts - are being demanded before they are engaged.

Pictured: Brandon Barnett, Relay's Financial Director

"This is perfectly reasonable," says Relay's financial director, Brandon Barnett.  "Recruiters are falling like ninepins and having several hundred workers out every day of the year relies on a depth of resource that many of them simply don't have.

"It is entirely sensible, therefore, for clients to ask, is my labour supplier in ‘a good place'?   Does it have the cash reserves to fulfil its assignments?  If not, will the delivery of staff and personnel services we rely on be disrupted - just at a time when we most need to impress our clients with high thresholds and a problem-free service?

This piles additional woes on a beleaguered industry hit hard by reduced instructions and heightened competition.  Brandon adds: "While some go out of business because they have poor systems or service levels - or simply don't have the breadth of offer employers need - there is still work out there for those who are flexible and possess high calibre pools of labour.

"Sadly, though, many of those that tick theses boxes are heavily in debt or have no money in the bank.  As such, they simply don't have the critical mass to service employers without lines of credit and investors - two resources which have all but dried up. Until recently, they could continually refinance and trade on future receipts.  Now, though, with a radically changed lending landscape, they must rely on money that is actually in the bank - and with depressed sales and delayed or defaulted payments gumming cash flow just when it is needed most, the situation spirals further out of control.

"This means, agencies whose financial landscapes don't hold up to clients' scrutiny don't even get the chance to fail; they can have the best, most innovative service offer in the world, but without cash reserves they won't put them into practice."

Relay managing director, Steven Street, calls Brandon Barnett the company's ‘Jiminy Cricket' - its conscience, caution and common sense.  Whereas Street, by his own admission, can be bullish, buccaneering and impatient to push through ideas and experiments, his financial director reins him in, assessing risks and always acting as a prudent guardian to the company's resources.

"We work with our own receipts," he says.  "Money that is actually in the bank - not what we expect to be there tomorrow - as there's many a slip twixt cup and lip.

"Brandon saw to it that profits were deployed into growth, savings and assets; that the company remained debt free as it expanded; and that scrupulous financial systems reduced the need for loans and protected cash flow."

The theory is one thing, but what have been the mechanics of actually achieving the healthy working capital that is now standing Relay in such good stead?  According to the financial director, it boils down to common sense and disciplined working practices.

"Prompt collection is vital, so invoices are always accurate, which means there are few disputes and late payments.   This isn't just down to Accounts staff, but because of the effective reporting and due diligence we have bred into Consultants and Account Managers.  When you consider that a disputed amount of, say, £30 can hold up a payment of several thousand, it's something you simply cannot afford to be sloppy about.

"We see to it, also, that we establish and maintain excellent relationships with our clients' Accounts and Purchase Ledger departments, again leading to minimal payment disruptions. 

"This is coupled with assiduous monitoring of forecasts and budgets and the spending patterns, payment performances and other behaviours of clients for signs of financial distress.  It's much better to detect something starting to going awry then tackling it before it actually becomes a problem, than reacting when it has been allowed to develop into a serious issue."

"Examples include clients who might be encountering difficulties being offered altered working arrangements and free financial consultancy.

"Excellent management reporting ensures controlled gross margin and costs, while the close scrutiny of incoming invoices also ensures that no more than necessary leaves Relay.  With this in mind, minimised tax payments have been achieved by ensuring that every legal means of lowering our liability have been enacted.

"Many of these measures might seem obvious," Brandon concludes, "but far too many organisations don't actually invest the time needed to implement them.  It's an easy trap to fall into - so often I hear agencies complaining that they are too busy doing the business than taking care of it - but one that must be resisted."