Accounts Receivable Trading Case Study -Quorum Technical Staffing
Use receivables trading to generate working capital
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Quorum Technical Staffing
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TRE Seller Profile
Company: Quorum Technical Staffing
Founded: 1998
Industry: Staffing - specializing in Financial Services, IT, HR
Size: 20
Prior short-term financing solution: Factoring
Trading Activity: Recurring invoices from Fortune 100 Companies
Companies turn to staffing firms to help relieve them of the time-consuming challenge of finding talent and filling temporary work force gaps. For the staffing industry, the past two years couldn’t have been more different from one another. In 2007, the staffing business set an all time high with temporary and contract staffing average daily employment numbers setting record highs in the second and third quarters of 2007, according to the American Staffing Association’s June 2008 report. However, by the second quarter of 2008, staffing agencies started to see a reduction of requisitions coming in, and current clients were asking for extended payment terms. By the third quarter of 2008, as reported in The Wall Street Journal last week, the pace of decline had accelerated.
For New Jersey based Quorum Technical Services, the ability to serve the staffing, procurement, and payroll service needs of its blue chip customers is only one of the business challenges CEO Jack H. Karamanoukian had to conquer over the past 10 years of building his business. Fortunate to count some of the world’s largest financial services and hospitality companies as long-time customers, he has also diversified his client roster by providing recurring staffing needs, payroll services and talent acquisition consulting to companies focused in information technology, municipal and state government agencies and federal defense contractors. Still, managing cash flow in this business is one of the most challenging issues for staffing industry CFOs, even in good times.
Staffing firms are heavy in payroll expense as a percentage of their total expenses. Payroll expenses in the staffing industry typically account for 70%-75% of their total revenue. Firms must fund the payroll costs for all contingent labor including all payroll taxes (FICA, FUTA, and SUI), unemployment, disability, workers’ compensation taxes and employee claims. This burden can create a significant timing mismatch when their customers impose payment terms that can extend as long as 60 days in some cases. In order to meet payroll on a regular basis, staffing firms are constantly challenged to make their cash flows match their payroll needs. Because staffing companies are often light on tangible balance sheet assets, procuring a bank line often proves difficult; and in the current credit crunch, it is nearly impossible.
A good partner in tough times
Quorum has developed a reputation for superior customer service, lauded for its responsiveness and the strong relationships it develops with its clients. As some of its best and oldest clients started to ask for extended payment terms, Jack worked with them to find a way to help. Knowing that they have always been good for their payments, he made the strategic decision to use these tough times as an opportunity to further strengthen his relationships with these clients. Consequently, when the economy strengthens he will be even better positioned to serve their staffing needs.
Like many other staffing firms, Quorum has experimented with factoring in the past. “Many staffing companies utilize factoring because it has often been the only choice to help us manage our cash flow challenges. Without it, we wouldn’t be able to match cash flows. But with factoring, you give up control of the financing. You have to factor all of your receivables—even those you don’t need or want to finance, and you don’t have any control of the pricing. It really is a financing arrangement that has not changed with the times. In an era where the Internet has democratized just about everything, financing accounts receivable has remained exactly the same.”
A dose of flexibility to ease the pain
Working capital management challenges are ubiquitous in the staffing industry and Quorum is no different. Yet in the midst of the most challenging credit crisis in recent U.S. history, Quorum decided to take an innovative approach to managing cash flow. In order to smooth out the flow of payments to better cover the recurring payroll liabilities for his staff, Jack turned to The Receivables Exchange as an innovative new tool to help him optimize his working capital and manage his cash flow.
“The complete control and flexibility that The Receivables Exchange brings to Sellers is what makes it an entirely different financial transaction,” he added. “With TRE, I get to choose which receivables I finance and the numbers I’m willing to accept. For Quorum, this makes all the difference – suddenly we’re in the driver’s seat in optimizing our working capital management. Since I know exactly which companies are going to pay and when, I can incorporate weekly transactions on TRE as a regular part of my working capital management, forecasting the financing costs and including those in my monthly budget. And, having established a trading history on TRE, we’ve been able to generate predictable competition for the purchase of our auctions.”
Improved cost of capital, decreased DSOs
Quorum typically sells the same recurring invoices from its regular staffing clients on TRE; TRE Buyers have come to value the predictability of Quorum’s transactions. After building up a track record of consistent payment, Quorum has been able to reduce its cost of capital as Buyers competitively bid to purchase its invoices.
Since TRE Sellers accrue fees on a daily rate instead of a static 30 day period or a 7 day period, companies avoid penalties if their customer ends up paying earlier or later than the expected pay date. “TRE is really ideal for the staffing industry,” remarks Jack. “Companies in this industry are typically beset with regular working capital management issues. The Receivables Exchange is an easy solution for smoothing out the flow of money and normalizing DSOs (Days Sales Outstanding), which is key to optimizing working capital.
With the Economy slowing, larger companies are squeezing their suppliers in several ways. Outside of losing the orders outright, the extension of payment terms can be the most painful for small businesses. In good times, not being able to collect on hard earned revenue in a timely manner can be frustrating; these days, it can be the death knell for otherwise thriving businesses.
“It’s simply smart business to have multiple financing options available in case you need quick access to capital,” states Jack. “But these days, it’s not just prudent; this year, it will be the key to making it to next year. I believe that figuring out how to run your company in the toughest of times makes you stronger and better positioned when the turnaround comes. As other businesses will have closed their doors, Quorum will be there ready to grow.”
Everyday more small and mid-sized businesses are taking control of their working capital management and bolstering their operations by signing up to become TRE Sellers. Learn how to become a Seller on the Exchange. Find out more about Quorum Technical Services.
