Companies in temporary labour market requesting extensions to invoice finance facilities
We are currently seeing an increasing number of companies in the manpower/temporary labour market which are requesting extensions to their invoice finance facilities.
Why the pick up?
A pick up in the economy is resulting in businesses seeking to take increased labour force capacity from the temporary labour market rather than take on further fixed costs. A greater shift to online and click & collect with investment in storage, distribution, picking, administration and call centre support, are all attracting temporary labour again to avoid the fixed costs and help staff peak requirement times. The temporary labour sector is benefiting from this growth with new contracts being awarded and higher levels of demand, bringing with it increased demand for on working capital.
Why should you be concerned?
Temporary labour continues to be a highly attractive sector for the Invoice Finance market. Traditionally it’s seen as low risk, advance rates can be over 90% and the margins low due to fierce competition. Many of the businesses in the sector grow quickly on the back of contracts from customers. This growth is often poorly managed and the companies either lack the financial discipline or the management ability to recognise and plan for such growth.
These businesses are often thinly capitalised having stripped out profits through dividends and other drawings. Therefore the ability of the balance sheets to fund growth or absorb a period of poor trading is limited. This often means that short term crisis funding turns to the Crown for PAYE/VAT deferment under a time-to-pay arrangement.
Management believe their companies have real equity value; however, profit, and more importantly EBITDA, can be extremely low, a turnover of £100m may only convert to EBITDA of £2m, with a multiple of say eight a very rough equity value of £16m may apply. What this ignores is that the ID line is debt and it is feasible that this could be as much as £20m on a £100m turnover. So in a distressed situation where is the value and how easy is your exit?
Add to this the risk of a buyer reducing price for loss making contracts, and funding arrears of pay, then the equity value can easily disappear. This improves the scope for a buyer to try and reduce the debt value and ultimately could impact your security.
We have highlighted before the tax risks around umbrella companies in the temporary labour market and these remain an issue. This area could have serious repercussions for certain businesses in the sector in terms of investigations, fines, penalties plus PR damage and potential customer loss etc.
Concerns also prevail around the consolidators, or managed service providers, and where contractual obligations lie. Their ability to drive down margins and impact on your debt is also of concern.
How can KPMG help?
KPMG can help you assess whether facilities in place can support the planned growth of your client through a thorough review of your client’s business and business plans. Where management information is weak this can lead to a lack of understanding around profitability by customer, sector, individual office location etc; what the impact of the loss of a major customer might be and how credit control procedures may be impacting negatively. Key recommendations from a KPMG review can assist you and your client in these areas.
A KPMG review of whether the client is allocating costs correctly, and in full, will be part of an overhaul of pricing strategies and our sales and margin improvement projects are designed to help management unearth key insights into both revenue generation and cost reduction. This can help to significantly improve their bottom line in a sector which traditionally delivers very low profitability.
Additionally, KPMG can assist you in assessing the strength of the accounts receivable underpinning your funds out, whether contracts are loss making and whether contractual terms might erode value should the client become stressed or distressed.
