Analysis of Accounts Receivable & Financials for Payroll Funding
Payroll funding companies and staffing industry accounts receivables factoring companies will always closely analyze your accounts receivables-financial data before taking you on as a client. Statistics are available showing the typical financial operating performance of staffing agencies in the U.S., including normal ranges for staffing agency balance sheets and income statements. These often include a full range of numbers for
companies, from strong performers, to ones with weak performance, along with medians or averages.
Three sources for staffing agency and accounts receivables performance include The RMA Risk Management Association, Staffing Industry Analysts/Publications, and the American Staffing Association, all provided by those organizations at a cost. Flexible Funding, by arrangement with RMA, is providing some of this data here on the Flexible Funding website. Please see disclaimers for the data. RMA is an organization that researches and publishes financial performance data of staffing agencies, and of every other industry, for use by CPA’s, the Banking Industry, payroll factoring or payroll funding companies, and for investment and credit professionals. RMA follows general banking guidelines consistent with sound credit practices and specifically defines staffing as “temporary help services”.
The figures for highly specialized niche staffing agencies, such as some engineering specialties, may differ from these RMA numbers. For example, a highly specialized contract engineering agency would normally enjoy a higher net profit than a firm providing general labor or a light industrial staffing firm.
Funding companies calculate financial “ratios” using simple division to see if they fall in line with the performance of receivables of most other staffing agencies, and/or the funding company’s qualification parameters. Accounts receivables performance is often referred to as “turnover ratios”.
The first accounts receivables analysis ratio is the Sales/Receivables ratio. You calculate it by dividing net sales by trade receivables.
Trade Accounts Receivables
This ratio measures the number of times receivables turn over during the year– basically how many times in one year you complete the cycle of invoicing your clients and getting paid by them. The higher the turnover of receivables, the shorter the time between sale (invoice date) and cash collection.
For example, a company with sales of $720,000 and receivables of $120,000 would have a sales/receivables ratio of 6.0. This means the receivables turn over six times a year. If a company’s receivables appear to be turning more slowly than the rest of the industry, further research is needed and the quality of the receivables should be examined closely. (A problem with this ratio is that it compares one day’s receivables, shown at a statement date, to total annual sales and does not take into consideration large seasonal fluctuations…. Some agencies need to divide annual average net sales by annual average trade receivables. An additional problem in interpretation may arise when there is a large proportion of cash sales to total sales.)
The second primary analysis of accounts is calculating The Days’ Receivables. To do this one would divide 365 days by the number of receivables turns per year (the Sales/Receivables ratio).
This figure expresses the average number of days that receivables are outstanding. Generally, the greater the number of days outstanding, the greater the probability of delinquencies in accounts receivable. A comparison of a company’s daily receivables may indicate the extent of a company’s control over credit and collections. One must take into consideration the terms offered by a company to its customers because these may differ from terms in the industry.
For example, using the sales/receivables ratio calculated above, 365 divided by 6 = 61 (i.e,. the average receivable is collected in 61 days.)
One last point of ratio analysis on receivables:
If you already know how many days the average receivable is collected in, you can divide those days into 365 to determine, or crosscheck, the number of annual turns on the accounts receivables. Example:
61 days = 6 turns of the receivables per year