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Why and how do agencies fail?
Thread poster: Dan Lucas

Dan Lucas  Identity Verified
United Kingdom
Local time: 13:55
Member (2014)
Japanese to English
Jan 29, 2016

I was reading an unfortunate tale in another area of the site about somebody who is owed money by a UK agency and who seems unlikely to get paid. This whole episode made me wonder about translation agencies and why and how they get into difficulties, apparently quite frequently.

In this particular case the director of the company seems to have no experience in translation. His background is in engineering and if he has any linguistic skills they seem to be informal. So in his case one common strategy - starting out as a freelance translator then gradually taking on the management of larger projects - was presumably not available to him.

In terms of expenses, the two major items would be have to be rent and salaries, either of the freelancers with whom the agency works or (if you're confident) in-house staff. However, if you start out as a freelance translator working from home and handling small- to medium-sized projects I guess rent would not be an issue. That leaves payment for freelancers.

From that it would seem that the key issue is the age-old funding gap: how to pay your suppliers if and when you haven't been paid by your own clients. Which suggests that it's a simple matter of capital.

Presumably most agencies are not paid up front, at least most of the time, which leaves them scrabbling for funding. Or do agencies routinely get paid up front?

Anybody here with actual agency experience who can comment?

Regards
Dan


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Angela Rimmer  Identity Verified
United Kingdom
Local time: 13:55
Member (2014)
German to English
+ ...
Capital and cash flow, I think Jan 29, 2016

Interesting question, Dan.

My experience has been that agencies are not usually paid upfront. So they have the issue of needing a regular cash flow that takes into account which invoices need to be paid versus how much money is coming in (just like any other business, I suppose).

The agency I worked for before going freelance did occasionally have cash flow problems, although that was almost always because the owner of the company was dipping into the company funds for his personal stuff (like one time he put down a massive deposit on a house using company funds). Of course irresponsible financial management like that is going to lead to cash flow problems. Since he retired and his son (who is a certified accountant) has taken over, the company's cash flow has been much more stable. (I still remember the day the house deposit went out. His son was panicking.)

With bigger projects where the invoice amount is going to be huge and it might impact cash flow, often agencies will negotiate a gradual payment plan (50% this month, the rest the second month, for example) or a longer payment term (45-60 days instead of standard net 30, for example). That gives them the flexibility to arrange for the money to be available or collect from the end client, whichever seems more practical in the situation.

Anyway, I think you're right. It's a question of capital and managing cash flow wisely. I, for example, always keep a reserve in the company account and a tight check on which suppliers will be invoicing so that there is always money to pay my suppliers. I run at least two analyses a month, one mid-month and one to close the month, where I calculate how much I'm invoicing and how much my suppliers are invoicing and I never ever count the supplier's money as my own -- so their money is more or less safe from my clutches.


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Tom in London
United Kingdom
Local time: 13:55
Member (2008)
Italian to English
The translator has the same problem Jan 29, 2016

Dan Lucas wrote:

... it would seem that the key issue is the age-old funding gap: how to pay your suppliers if and when you haven't been paid by your own clients.



It's the cashflow problem and affects all businesses large and small. Cashflow problems are the no.1 reason why businesses go bankrupt. The best way to avoid cashflow problems is to (a) have as many different clients as possible and try not to rely on just one major source of income (difficult though it may be to avoid this) and (b) give yourself a substantial cash safety net (money in the bank) to tide you over when an expected payment fails to materialise. These precautionary measures apply equally to translators and agencies (and all other types of business).

An unethical way to avoid it, very common in Italy, is to NOT PAY YOUR TRANSLATORS for three months or more. For example: let's assume that you, as an agency, have 50 translators on your books, working in all language pairs, and that they invoice you, on average, for a modest €500/month. Even if only half your clients pay you on time, that means that on a regular basis you will have at least €12,500 sitting in your bank that you're not going to be paying out for the next 3 months. Put that €12,500 in a high-interest bond or deposit account, and it'll cover all of your office costs. Which are also tax deductible.

Yes: it would be interesting to hear some stories about agencies that have failed, direct from the horse's mouth.

[Edited at 2016-01-29 09:41 GMT]


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Lingua 5B  Identity Verified
Bosnia and Herzegovina
Local time: 14:55
English to Croatian
+ ...
Charge them more... Jan 29, 2016

Tom in London wrote:

Dan Lucas wrote:

... it would seem that the key issue is the age-old funding gap: how to pay your suppliers if and when you haven't been paid by your own clients.



It's the cashflow problem and affects all businesses large and small. Cashflow problems are the no.1 reason why businesses go bankrupt. The best way to avoid cashflow problems is to (a) have as many different clients as possible and try not to rely on just one major source of income (difficult though it may be to avoid this) and (b) give yourself a substantial cash safety net (money in the bank) to tide you over when an expected payment fails to materialise. These precautionary measures apply equally to translators and agencies (and all other types of business)

An unethical way to avoid it, very common in Italy, is to NOT PAY YOUR TRANSLATORS for three months or more. For example: let's assume that you, as an agency, have 50 translators on your books, working in all language pairs, and that they earn on average a modest €500/month. Even if only half your clients pay you on time, that means that on a regular basis you will have at least €12,500 sitting in your bank that you're not going to be paying out for the next 3 months. Put that €12,500 in a high-interest bond or deposit account, and it'll cover all of your office costs. Which are also tax deductible.

Yes: it would be interesting to hear some stories about agencies that have failed, direct from the horse's mouth.

[Edited at 2016-01-29 09:31 GMT]


Set a special rate for agencies paying after 30+ days. There is no sense in providing a translation in 5 days and then getting paid for it in 120 days.

I presume agencies may fail for different reasons. I only know the way they do business correspondence with freelance translators is often times substandard, asking you numerous questions when sending an offer (the rate, the deadline etc) without providing much, if any, details about the text, volume etc. It makes them look like they are running a business from someone's basement.


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Tom in London
United Kingdom
Local time: 13:55
Member (2008)
Italian to English
A common complaint Jan 29, 2016

Lingua 5B wrote:

....There is no sense in providing a translation in 5 days and then getting paid for it in 120 days.



This is a common complaint in the Italian-language forums. It's the equivalent of going to the butcher's to buy 100g of minced beef and promising to come back and pay for it in 90 days' time.


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Lingua 5B  Identity Verified
Bosnia and Herzegovina
Local time: 14:55
English to Croatian
+ ...
The most annoying thing here is... Jan 29, 2016

Tom in London wrote:

Lingua 5B wrote:

....There is no sense in providing a translation in 5 days and then getting paid for it in 120 days.



This is a common complaint in the Italian-language forums. It's the equivalent of going to the butcher's to buy 100g of minced beef and promising to come back and pay for it in 90 days' time.


That you are pressed to send the translation ASAP (sometimes it's a small translation that you can provide in 1 day). 1 day vs. 120 days. Not nice, isn't it?


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Tom in London
United Kingdom
Local time: 13:55
Member (2008)
Italian to English
I know Jan 29, 2016

Lingua 5B wrote:

... you are pressed to send the translation ASAP (sometimes it's a small translation that you can provide in 1 day). 1 day vs. 120 days. Not nice, isn't it?


I know, but they have us by the short and curlies. What can we do?


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Lingua 5B  Identity Verified
Bosnia and Herzegovina
Local time: 14:55
English to Croatian
+ ...
What about... Jan 29, 2016

Tom in London wrote:

Lingua 5B wrote:

... you are pressed to send the translation ASAP (sometimes it's a small translation that you can provide in 1 day). 1 day vs. 120 days. Not nice, isn't it?


I know, but they have us by the short and curlies. What can we do?


If you are "flexible" with your payment, may I be flexible with my deadline?


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Tom in London
United Kingdom
Local time: 13:55
Member (2008)
Italian to English
My fear Jan 29, 2016

My fear is that one agency that gives me a lot of work might fail one day. They too pay at 90 days (+) but they do pay and they have a very friendly attitude. What would I do?

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Jenny Forbes  Identity Verified
Local time: 13:55
Member (2006)
French to English
+ ...
Under-capitalisation and mismanagement of VAT and income tax obligations Jan 29, 2016

I can't speak as an agency because I'm a sole trader / freelancer. However, I have, regrettably, experience of two agencies which went bankrupt, owing thousands to hundreds of translators. The reasons were under-capitalisation and outrageous mismanagement of their own tax affairs.
I can't, of course, name the agencies here.
My most recent such experience was with an agency for which I'd been working entirely satisfactorily for about two years. Payment was always punctual. Then, in April 2014, they sent me another smallish order (worth about £80) which I carried out and dispatched. Two days later, I received a notice that the agency had gone into "voluntary liquidation" and that I should register the debt due to me with the liquidators. I didn't get paid, of course, and neither did the hundreds of others who were owed much more than me. The directors, at least, must have known what a mess the agency was in when they sent me that order and that they wouldn't be able to pay me.
I later discovered from a trusted colleague that the boss of the bankrupt agency had not been paying his VAT for years and, when HMRC pursued him, the sum he owed in VAT was so great that he couldn't pay, whereupon his company was obliged to go into liquidation.
About a year after that, I was contacted by a new agency offering an urgent job of moderate size which I accepted. Then, by sheer chance, I discovered that the "new" agency had reopened a couple of months after the old one had gone bust, under a different name but at the same address, with identical order forms, terms and conditions, etc. The new boss was the wife of the previous boss. I telephoned them immediately and told them what I had discovered and that I wouldn't do any further work on the order unless they paid me in full up front. The PM admitted what had happened, apologised, and paid me in full in advance for the current order (but not, of course, the debt the bankrupt agency had owed me).
Apparently, it is perfectly legal in the UK for bankrupt companies to reopen under a different name in this way. Some do so more than once. They're called "phoenix companies".
Nice.


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Dan Lucas  Identity Verified
United Kingdom
Local time: 13:55
Member (2014)
Japanese to English
TOPIC STARTER
We all know the answer to that one Jan 29, 2016

Tom in London wrote:
My fear is that one agency that gives me a lot of work might fail one day. They too pay at 90 days (+) but they do pay and they have a very friendly attitude. What would I do?

Don't sit around and wait for it to happen. Diversify your client base! I know it's easier said than done as one has to determinedly de-emphasize a proven existing source of income in search of new and unproven clients.

But to go back to the original topic, this presumably - and as you yourself pointed out - is a strategy used by agencies to better cover their short-term cash flow needs.

Add to that Angela's comments about balancing cash and it does look as if we have the following pattern.

  • New agency enters translation business, drawn by lack of barriers to entry and prospect of easy money and little if any up-front investment.
  • After some marketing they find themselves getting flows of business. This presumably also holds for existing agencies that suddenly increase their marketing work, which may explain why agencies that were good payers for years suddenly have problems: a case of over-reach?
  • As they start taking on more or larger projects, they find themselves paying translators and others more quickly than they're getting money in from customers. They're effectively under-capitalized for the scale of business they want to take on.
  • This leads to payment problems, which in turn leads to reputational issues (Blue Board, paymentpractices.net, Zahlungspraxis etc.) which means they have problems attracting the more competent freelancers, implying poorer work and more deadlines missed. A vicious cycle has begun.
  • If they remain over-committed they will be unable to pay all their linguists on time eventually their suppliers will start bringing legal actions against them and the firm will fail.


Regards
Dan


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Tom in London
United Kingdom
Local time: 13:55
Member (2008)
Italian to English
Perfectly legal Jan 29, 2016

Jenny Forbes wrote:

..... a notice that the agency had gone into "voluntary liquidation" .... I didn't get paid, of course, and neither did the hundreds of others ..... The new boss was the wife of the previous boss....apparently, it is perfectly legal in the UK for bankrupt companies to reopen under a different name in this way. Some do so more than once. They're called "phoenix companies".
Nice.


And every time, the directors walk away with a large bag of cash whilst people lose their jobs.

On glaring example: the MG Rover car company ceased production on 15 April 2005, when it was declared insolvent, resulting in the immediate loss of more than 6,000 jobs at the company. But the 4 Directors walked away with a fortune.

If I were more cynical than I already am, I would set up a company that is *designed to fail*, pay myself a very generous salary, and let it run until it goes belly-up. Then I'd get my brother, or wife, or my dog, to set up another one. This seems to happen all the time.


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Dan Lucas  Identity Verified
United Kingdom
Local time: 13:55
Member (2014)
Japanese to English
TOPIC STARTER
Companies House Jan 29, 2016

Jenny Forbes wrote:
Apparently, it is perfectly legal in the UK for bankrupt companies to reopen under a different name in this way. Some do so more than once. They're called "phoenix companies".
Nice.

I know which company you're talking about Jenny. You're absolutely right, there's a long-standing and dishonorable tradition of directors starting new companies.

These days if I have any concerns I search Companies House right away for a list of the officers, whether the company accounts are up to date and so on. It's all online these days and that makes things so much easier.

However, in the specific case you mention, the director of the liquidated firm used a slightly different name when registering for this new company, presumably to avoid being linked to his record at the failed company. Not nice.

Regards
Dan


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Michael Wetzel  Identity Verified
Germany
Local time: 14:55
German to English
prompt payment discounts? Jan 29, 2016

Does anyone know how common it is for agencies to use prompt payment discounts (directed towards their clients) to avoid cash-flow problems?

If they can trade 2 or 3% of their net sales in order to motivate many of their clients to pay well before most translators expect to be paid that seems like a very economical and effective solution - especially since many freelancers place a high priority on being paid quickly.


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Vincent Lemma  Identity Verified
Italy
Local time: 14:55
Member (2008)
Italian to English
+ ...
Check out the agencies that you are working for.. Jan 29, 2016

Hi all,
I work for many Italian agencies and often face the 60 to 90 day payment issue. However, aside from that, I think that any translator on ProZ should look at the Blue Board ratings of an agency before entering into any dealings with them.
Of course, this is not a guarantee that the agency will never fail, but it does give you a glimpse of what their track record is.

As far as providing a sound and secure cash flow, I fully agree that personal cash management is important (a little harder in Italy for all the financial restrictions and obligations) and this should also serve as a guide on how to plan your work. We all love our jobs (or so I'd like to think),; however, it is important to set goals on how many words you actually need to translate per month/week/day to get by.

Personally, to protect myself against agency flops, which will happen if I am cautious or not, I tend to freelance. Specialised services and knowledge are of extreme importance to avoid having to reply on agencies in the first place, or at least to limit this.

I like to think that I am my own little one-man agency, and that strongly drives me to reach my goals.

Cheers,

Vince


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