Localization Business School: Accounting for better translation quality

Buyers of localization services know this phenomenon: the quality of your translations suddenly deteriorates even though the translation vendor appears to manage quality well. No matter how hard the vendor seems to be working on improvements, nothing changes. What happened?

The answer might not be found in linguistic quality control. The root cause for low translation quality may lie in accounting. How fast and reliably a localization service provider (LSP) pays its freelance translators is as relevant to translation quality as their internal quality management practice.

Here is the logic: the best freelance translators have the widest choices of companies they can work for. Market pressure dictates word rates, so most vendor companies pay their freelancers comparable rates. If it isn’t income that makes the difference, then it’s the relationship, and the morale created by prompt payment shapes the perception of the quality of a business relationship.

Freelance translators who get paid late will gravitate to business partners that pay faster and on time. If you want to check how your LSP performs, you only need three numbers: direct cost, number of days in a year and accounts payable.

To calculate the average payment period, determine the average cost per day. From the annual profit and loss statement, divide the number in line “direct cost” (or cost of goods sold) by 365 days.From the annual balance sheet for the same period, take the number in line “accounts payable” and divide it by cost per day (Figure 1).

For example, a fictional LSP called Quasi Trans has the following imaginary data: a direct cost (or cost of goods sold) of $2,809,145 for a fiscal year. Divide this number by 365 (or 366 for a leap year). The company’s average direct cost (or purchases) per day computes to: $2,809,145 / 365 = $7,696 (Figure 2).

In the line item “accounts payable” in the liabilities and equity section of the corresponding balance sheet (Figure 3), the company shows a liability of $754,721. Quasi Trans’ average payment period is $754,721 / $7,696 = 98 days (Figure 2).

In other words, Quasi Trans pays its vendors on average three months after submission of an invoice.

Ask yourself: If you were a capable translator and had a choice between a customer that pays within 45 days, and Quasi Trans, which pays after 90 days with an equal pay rate, which one would you chose?

When hiring an LSP, make sure the vendor’s payment practice enables translation quality. The longer it takes a company to pay its translators, the less likely it is that they will retain the ones who deliver the best quality.

Remember that it’s a two-way street — the faster and more reliably a buyer pays an LSP, the easier it will be for them to deliver quality. Which leads us to the next money matter that counts in translation quality.


LSP dependency on suppliers

LSPs, of course, do not pay late because they do not care. They are just managing their financials in a way that enables them to stay in business. LSPs often pay freelance translators only after the benefitting customer pays the LSP’s bill first. That’s one effective way of ensuring that more money comes in than is going out — also known as positive cash flow. That’s important for an LSP, because if more money goes out than is coming in (negative cash flow), the company will need to borrow money. LSPs do not always need to go to a bank for that — many just borrow from their freelance translators at no additional cost, such as those annoying interest fees. They simply pay their freelancers after they get paid themselves to achieve positive cash flow. You can determine how much an LSP makes use of this practice as follows:

Divide “accounts payable” in the liabilities and equity section of the corresponding balance sheet (Figure 3) by the line “cost of goods sold” (or direct cost) in the company’s profit and loss statement.

In the case of Quasi Trans, the dependency on suppliers for finance is 27% (Figure 4). This is not unusual for the localization industry.


Average collection period

In the case of Quasi Trans, the main reason for having to rely on their translation freelancers for finance, however, lies solely in the customers’ paying morale. The customers need an average of 171 days to pay invoices. You can calculate the average collection period by first determining the average sales per day. From the annual profit and loss statement (Figure 5), divide the number in line “net sales” (or revenue) by 365 days. From the annual balance sheet for the same period, take the number in “accounts receivable” and divide it by “average sales per day,” (Figure 6).

For example, Quasi Trans shows net sales (or revenue) of $4,982,671.65 for the fiscal year. Divide this number by 365 (or 366 for a leap year). The company’s average sales (or revenue) per day computes to: $4,982,671.65/ 365 = $13,651.16. In the line item “accounts receivable” in the assets section of the corresponding balance sheet (Figure 7), the company shows unpaid invoices of $2,339,730. Their average payment period is $2,339,730 / $13,651.16= 171 days (Figure 8).

Quasi Trans has no option other than to pay its freelancers late, which in turn motivates the best translators not to work on their clients’ projects, but for someone else instead. The clients’ own late payments to their LSP limits their ability to secure the best resources. Paying on time can be more effective than adding another quality assurance cycle to the project.

You will notice that Quasi Trans pays its vendors within 98 days, while its own customers pay after 171 days on average. At this rate, Quais Trans not only has a quality issue, it is going broke.

If you are an LSP, then you might consider reminding your customers earlier about their late payments. This is not rude, but necessary to ensure the best service to your customer — and everybody wins. Clients get better quality, LSPs run their business in a timely fashion and freelancers are happy.