Risks for SME Agency Owners and Operators

Risks for SME Agency Owner Operators
Thoughts of a small On–hire and Recruitment Agency Owner
I thought it may be of interest to share a few thoughts about running a boutique perm and labour hire business compared with being employed in a large International agency.
This article contains some of the key areas and is by no means an exhaustive list of the challenges experienced. Having been employed in the industry since 1995 I have worked as a perm and a temp consultant through to senior management for a number of internationals and now own a small perm and labour hire agency in Auckland. Many of the challenges are similar however direct exposure to these challenges varies according to one’s management seniority and/or financial interest in the business. As an owner my consideration of financial risk has magnified considerably as I am now totally responsible for the profitability or losses.
I had heard the expression “Cash flow is King”, however now this has taken on an entirely new perspective. No longer available are the deep pockets, large overdraft facilities, and the ability to be a small fish in a very large pond where a loss can be absorbed or hidden for a period while managing the business to profitability. Losses can only be sustained for a short period or potential personal financial ruin is a very real concern. When it comes to SME’s, banks are generally risk averse as unfortunately while small businesses may represent up to 90% of all businesses in New Zealand they also represent the largest proportion of failures and accordingly require Directors(owners) to guarantee loans and other financial arrangements with their own private assets. I am now focussed every month on the financial performance of my business. I am not only responsible for my own future but also that of the temps that work for me and my staff. If I am not careful in the way I manage the financials then all these people as well as my self are at risk. Being primarily an industrial based agency located in South Auckland most of our temps fall into the underprivileged, unskilled, and low socio-economic categories. It’s a responsibility which dwells on the mind but while we have a social responsibility we are not a welfare support organisation and accordingly must remain profitable to survive.
It was sobering to learn at an SME business conference in 2010 that most SME’s that go into liquidation are actually profitable at the time. It’s a lack of cash flow which means creditors do not get paid and debts grow rapidly. I manage cash flow on a daily basis, projecting inflows and outflows on a daily basis on a rolling three month planner. It is basic and simple on an excel spreadsheet but it works and allows me to anticipate cash shortages and when they are going to occur. With PAYE payments required every month on the 20th and GST on the 28thof every second month cash availability is challenging as coincidentally these are the same dates that our major clients pay their bills. The up to three day delay in clearing payments through the banking system can result in 2 penalty payments being incurred through late payment and again these are onerous and can rapidly build up so careful management is required to avoid these unnecessary costs.
Obviously debt management is a critical factor in cash flow management and as an owner or business manager you must be diligent in ensuring that debtors pay on time, every time. Errant debtors can cripple your business adding unnecessary cost and stress.
To ensure matters remain on track there must be many more clients on seven day terms than on 30 or more days. I believe at least 80% of debtors must be on 7 day terms to ensure good cash flow. If you agree to 30 day terms or 20th of the month be very sure that the company is financially stable and that you cap their debt in line with their size and ability to pay. Do not allow yourself to become your clients “bank” reducing their overdraft facility and transferring the cost of finance to you unless you have built an interest component into your margin. Be wise and don’t be afraid to walk away from self called “blue chip” clients if their terms of business are unsustainable.
For those that do not have the available shareholder funds or overdraft facilities debtor finance is the answer. I have been working with Scottish Pacific Finance for the past two years and they have been a key long term partner to our business being essential to our progress. Scottish Pacific is also a RCSA Premium Supporter and has25 years’ experience working with recruitment companies. They understand our industry which is different to my experience with banks. Labour hire is typically about high volume and low margin in comparison to most other industry sectors. Growing business volumes is a key driver to improving profitability and yet without this facility we would not be able
to grow our business as other finance facilities cannot keep pace with the size and speed
of this growth when necessary. Unlike an overdraft facility which has fixed limit, debtor finance grows with your business instantly providing 80% of the invoice value. The remaining 20% less management costs are released on invoice payment.
Gross margin is another factor in maintaining profitability. Much has been said about price cutting and pressure from clients to reduce our fees but do not get sucked in by a client who is purely looking after their own interests and focus entirely on cost. That is not a partnership and if you want to be treated as a commodity then don’t complain about clients treating you as such if you cannot show value. The industry continues to promote a facade of professionalism by miss-use of the word “consultant”. If you have the word consultant on your card then I urge you strongly to do just that. There are many ways you can do this such as keeping your client regularly informed about market conditions, salary and wage movements, hiring and skill trends etc, etc. It is also the major way you can differentiate yourself from your competitors. There is a lot of rhetoric around “point of difference” but lets face it recruitment is a process which most recruiters follow. So the real point of difference is how you interact with your client, the additional “added value” you can provide by assisting them to attract and retain the best people suitable to their business. Value is about worth,
NOT cost or price. If you compete on price it is just a race to the bottom. Accordingly beware of the involvement of procurement departments or specialists. Their focus is all about price. This is how they are measured. Ignore the rhetoric around “service” as this is just about what you will supply and at what cost; don’t ignore value or quality.
My advice to SME’s is if procurement is involved leave this to the large multi nationals who have the capacity and volume of business to make it profitable, albeit at a very low return on sales. As an SME learn to work smarter and not harder as you cannot compete with the overwhelming size of the international agencies. Concentrate on retaining your people and adding value by providing exceptional service to your clients. Concentrate on clients who
will value the same recruiters or consultants being involved with the relationship rather than the continual high turnover which unfortunately characterises our industry.
There are many, many challenges for SME agencies which I could continue to discuss but do not have the space, however one final topic for mention. There is one major potential risk which I think is becoming more prevalent and could potentially bankrupt an SME labour hire business. This is the “Hold Harmless Clause” in a supply agreement. At this stage it appears limited to the larger companies which require you to sign their supply agreement rather than your terms of business. These are the companies who are also the largest users of temporary labour and as such are very attractive target companies.
The “Hold Harmless Clause” will say something along the lines of “during the term of this agreement the supplier must indemnify and keep indemnified “Client” against all claims and all losses, liability and expenses incurred by “client” arising directly from an act or omission of the “supplier” or its employees, agents or sub-contractors...” it will also go on to include a lot of other statements which ultimately mean there is an unlimited liability. Be very cautious, in fact DO NOT sign one of these clauses unless you are very, very rich or a very lucky gambler, as such a clause is likely to void any insurance policy you have. Be aware that NO insurance policy provides for unlimited liability. I am also pleased to advise that the “Client”, when asked, was happy to drop the clause and insert another clause in its place which absolved all my responsibility. A sort of reverse hold harmless clause. My assumption is that the legal advice they received realised that these clauses most likely would not stand up in court as they would be deemed to be “commercially unfair”, but it was a surprising and pleasing outcome.
I have also come across a variation of the hold harmless clause where the clause seeks to have the supplier cover the excess component of their own insurance. Such “excess insurance” is currently not available in either Australia or New Zealand and again a claim on this clause could void your existing insurance policies. Despite this, the company concerned assured me that other agencies had signed the clause however also appreciated my position on the issue. If you come across any clause that hints of “hold harmless” I recommend you get very sound advice before signing. In this respect I recommend Kirsty Young at i2i Insurance Brokers. Kirsty and i2i are RCSA Supporters and understand the unique aspects and requirements of our industry. i2i also provide very competitive insurance premiums for RCSA members. As a business owner or senior manager make sure that any contract
signed by an authorised person in your organisation has been thoroughly vetted and watch out for the “hold harmless clause”. Knowledge of clauses such as these in contracts is usually not a skill of business development people whose objective is to secure the business.
With all these critical business items mentioned here I still haven’t talked about the importance of having the right people on board and how to retain and motivate them, but that is another topic for another time.
John Harland
ERG Workforce Ltd
ERG Recruitment Ltd

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