Even in the best of economic times, cash flow dilemmas can nip at the heels of any business. But when times are tough, and your firmís liquid capital consists of a few coffee mugs and the bossí car, the pressure is intensified. This is particularly true in the IT staffing and services arena, when, in this economy, a client may not even be in business long enough to pay you for your services.
Chances are that your firm will be required to pay your IT talent before the firm itself ever sees a nickel from the client. "Our receivables probably run, on average, between 38 and 40 days," says Scott Hampoian, vice president and COO of TSG IT Resources.
Other firms experience similar lags, if not much worse, in the collection of client payments. To protect his company, Hampoian has established bank credit to allow TSG IT to deal with cash flow issues. But this procedure is not without expense. "We have a line of credit that covers our payroll," he says. "But thereís interest on that line. So, every day that we donít collect, it costs us money."
Hampoian notes that firms try to influence the speed of payment by the frequency of invoices sent to the client. However, not every client will allow its staffing partner to invoice on a weekly basis. "We try to negotiate the ability to invoice weekly," he says. "But a lot of clients will only allow you to bill monthly. So, if you pay your employees weekly, but can only bill monthly, you could be out 90 days before you receive payment from the client."
TSG IT has employed a unique strategy to deal with cash flow issues during the current recession. In most cases, the economy has hurt the client companies just as significantly as the average staffing firm, so Hampoian evaluates each potential client in order to assess the risk associated with taking on their business. As a result, heís been able to minimize the potential cash flow damage associated with the recession.
"Certainly, youíre now a lot more careful to take the business of a company youíre doing business with," he says. "You do a lot more due diligence on the front end, to check their credit references, and you establish a contract thatís going to be binding with them before that person starts. Because of that, you donít have that much bad debt out there."
Despite these precautions, Hampoian has seen that the clients are extremely cautious with the issuing of payments. "All of the companies have certainly started to spread out how quickly they pay," he says. "Theyíre trying to get as much money on the dollar as they can, earning more rather than paying us."
To speed up the process, TSG IT has developed some innovative incentives for their clients. "We offer prompt payment discounts," says Hampoian. "Weíll try to pre-bill for time, then offer a discount on the hourly rate if the client pays us in advance. Weíre trying to get more creative in order to avoid that cash flow problem."
In the midst of a cash flow crisis, logic would seem to dictate that staffing firms should approach their IT personnel about delaying their payments. But Hampoian cautions against taking this step. "The first time you do anything like that, itís going to send a real strong message to the people you have working for you," he says. "Once the client finds that out, thatís the last thing you want to happen."
If, during a project, the clientís payments become a problem, immediate action on the part of the staffing firm is the key. "Your collateral is the contractor," says Hampoian. "So, once thereís an issue, you can just say, 'Weíre pulling the contractor.'"
Even with the precautions and due diligence, there is still no guarantee that the staffing firm wonít get burned by the client. In a situation such as this, thereís not very much the firm can do. Ultimately, the liability for paying the contractors lies in the staffing firmís hands, not the clientís. "Weíve seen situations where the client kept up their payments until the time the contractor was finished," says Hampoian. "Then they just stopped paying. A legal hassle can be more expensive than the payments you would collect, and everyone knows this. Thatís the sad part."
This article previously appeared in the Purple Squirrel Intelligence Report. To start your subscription, log onto www.TalentEconomyMag.com