Word on the Street: Cash flow management

Million-dollar translation projects are supposed to make language service providers (LSPs) happy, right? The project managers in one unnamed North American agency had delivered one such project to the satisfaction of its Fortune 500 client, meeting all required technical and linguistic specifications. Everyone was already talking about the client’s next big project in the pipeline.

However, despite the successful delivery and promise of future work, project managers were frustrated, translators threatened legal action and company executives felt powerless to resolve the situation. So, what was the problem?

The problem — all too common in the language industry — was cash
flow. The client had delayed payment for months and the agency consequently delayed its payments to translators. The problem dragged on long enough that dozens of translators had publicly trashed the agency’s reputation online. A barrage of emails and phone calls from unpaid translators was slowing project managers. The same managers could barely make project assignments because other freelancers now refused to work with a company gaining infamy for slow payment. And executives felt helpless to resolve the situation without the cash needed.

The finance department desperately pointed employees to a glimmer of hope; at least this large client announced it had finished working in those language pairs. Consequently, the agency might be able to search out a fresh batch of unwitting translators for the next big project while repairing relationships with the previous linguists. That faint hope was crushed when the client surprisingly continued with the same language pairs. Project managers and vendor coordinators could no longer recruit translators who refused to trust the company without payment in advance. Service levels plummeted, and the client fired the agency.

The example above is one of the more extreme cases — although unpaid translators might call it deserved — but slow payment to freelancers is regrettably common in service industries.  Such delays are common enough that New York City recently adopted a law to fine companies that fail to pay freelancers in full by a date set forth in writing or within 30 days of completing an assigned task.

Common reasons for slow payment

Why are so many translation services companies slow to pay freelancers? The reasons are not usually as sinister as some translators might suspect.

LSPs often start with minimal investment. As in many service industries, the language service industry generally has very low barriers to entry, meaning companies can start up with very little upfront investment. With a little time, effort and an internet connection, just about anyone can declare themselves an LSP in its simplest form, accepting customer requests and making assignments to independent contractors. Since fixed start-up costs are not much of a hurdle, a new agency can cover its variable costs by paying suppliers after it receives payment from customers. For that reason, upwards of 28,000 LSPs have crowded the industry worldwide according to reports by Common Sense Advisory.

Cash flow is not well managed. As these LSPs grow, they begin to acquire slow-paying clients, including large customers that appreciate the time value of money and consequently use their size to impose very slow payment terms. Consider the typical cash flow timing of a $50,000 project. Can a small new agency afford to pay out $35,000 to cover freelancer costs within 30 days if it is not going to receive the $50,000 payment from the client for 60 or 90 days? Could you afford to finance $35,000 for a month or two? And can the same company access funding to do that again the following month as the amount of cash needed quickly rises? Many entrepreneurs do not consider this when calculating start-up costs, for which reason an oft-cited U.S. Bank report by Jessie Hagen states that 82% of business failures are due to “poor cash flow management skills” or “poor understanding of cash flow.”

Some chief financial officers will even use the ubiquity of this problem to justify slow payment.

“Finance people often focus on dollars and cents, saying it doesn’t make sense to pay translators quickly because no one pays them quickly,” said a translation startup CFO during an interview where he required that I refer to him only as Daniel to maintain his anonymity. “It seemed counterintuitive to others, but I wanted to see if there would be a benefit to handling payments differently…. I believed there would be benefits to paying translators quickly, and I believed it so much that I put my money where my mouth was, providing cash from my own pocket to fund the first rounds of translator payments.”

What benefits could justify bucking the trend of slow payment and aggressively tying up so much cash?

Advantages of prompt vendor payment

Loyal relationships with freelancers. “When we first started the company, I knew our success depended on having access to the industry’s best translators,” continued Daniel. “I wanted to see translators as partners, and I wanted them to want to work with us. What leverage would we have to entice them to do that? The carrot normally offered is consistent volume. But if we were carefully selecting specialized translators instead of generalists on a project-by-project basis, we couldn’t always control the volume each translator would get. The one thing I could control to earn their loyalty was fast payment.”

Daniel is not the only executive who sees benefits to paying translators quickly, but it requires a long-term perspective to see beyond an immediate need for cash.

“Freelance resources have choices about who they do business with and, in our view, it’s both unethical and incredibly short-sighted to dismiss them as expendable,” agreed Wordbank CEO Lindsay Johnson, whose freelancers have given her company a perfect 5.0 reliability score on PaymentPractices.net.

Preferential treatment and exclusivity. On PaymentPractices.net, where freelancers give numeric scores and free form comments to evaluate timely payment of thousands of LSPs, you see some interesting trends. Many firms that have earned the highest ratings are those targeting specialized industries like life sciences and patent translation, domains where companies must actively compete for the availability of limited expert freelancers.

“We know we get preferential treatment from our freelancers,” says Elisabete Miranda, president and CEO of CQ Fluency, whose translators have given the company not only a perfect 5.0 reliability score on PaymentPractices.net but also a perfect 5.0 score on the ProZ.com Blue Board. “When a translator simultaneously receives two project offers and they must choose between us and a company that has 90-day payment terms, which project do you think they choose to accept? Our official payment terms are 30 days but we try to beat that by at least one week every time, helping to make us the obvious preferred choice for translators.”

Translators show their loyalty not only when faced with two conflicting project offers but also when choosing long-term associations. Personally, I know translators in high demand who work almost exclusively with fast-paying direct clients and refuse to work with LSPs except the rare one that has earned a reputation for almost instant payment.

Referrals and reputation. Fast-paying LSPs see benefits beyond just translator availability. Daniel’s company aggressively completes all payments daily in most regions and weekly in others. His colleagues report that freelancers happy with their payment terms have gratefully helped bolster his company’s image. Not only do Daniel’s freelancers write positive online reviews and refer other good translators to the company but they also refer major clients that have contributed significantly to revenue growth.

Streamlined operations and high employee satisfaction. Prompt payment practices not only help freelancer relationships but also benefit in-house operations very directly. Contrast the experience of the slow-paying company mentioned earlier.

Easier project assignment. That cash-crunched company’s project managers wasted many hours making assignments before each project because translators refused to work with them. Even companies with 45-day payment policies can be inefficient in recruiting because the industry’s best translators may refuse such assignments to selectively work with faster-paying firms. And when managers are desperate for anyone to fill an assignment, they do not have the luxury of requesting special favors.

“Our project managers and interpreter coordinators don’t have a problem convincing anyone to work with us,” affirms Miranda, who explains another advantage of CQ Fluency’s reputation. “More than just accepting work, freelancers often go above and beyond to help us, and that makes a project manager’s job much easier.”

Unburdened project managers. Project managers at these slow-paying companies also waste many painful hours triaging the complaints that filled their email inboxes and voice mailboxes. This additional burden can contribute to employee burnout and eventually affects the service offered to clients.

“People always do better work when they feel valued, and we work hard to develop lasting relationships with our in-country resources,” says Johnson. “That results in better linguistic quality, better support for project managers who know they can rely on our linguists to deliver and, ultimately, a better service for our clients.”

Streamlined accounting. Would all this help for freelancers and project managers come with increased burdens for accounting and finance departments? Daniel affirms it does not.

“Fast payment actually makes things easy for people working in accounting,” explains Daniel. “Our work is much more efficient because invoices and payables are only handled once when we make payments almost immediately.”

Every company needs to weigh its options surrounding payment terms. Slow payment of vendors may help with cash flow in the short term and quick payment will unavoidably tie up some cash in the short term. However, prompt payment brings many long-term advantages to a company’s vendor relationships and internal operations that companies would be wise to consider.