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The “Real” Cost in Processing a Bill in the Staffing Industry
Is Your Financial Analysis Comprehensive Enough?
By J. Peter Donlon, Executive Vice President, API Outsourcing, Inc.

St. Paul, MN, November 2004 - The demand for flexible labor offered through temporary staffing arrangements continues to grow in the U.S. as the business environment strengthens. This improvement in the labor market is anticipated to result in an increase in billing rates and stabilization of gross margins throughout the temporary staffing industry. At the same time though, companies are experiencing increases in operating expense levels, driven primarily by investments in new technology and initiatives to strengthen internal controls and quality. Many of the investments are being targeted to improve the accounts receivable process ö a process long neglected, and therefore, an attractive opportunity to improve quality and cost and ultimately raise profitability.

In the temporary staffing industry today, the average cost to create and receive payment for a bill is estimated to be in the range of $6.98 to $23.62. This is a tremendously broad range with the more cost-efficient companies at the low end and less cost conscious companies at the high end. Previous cost studies often focused exclusively on the administration costs and have under-represented the significant costs associated with carrying the receivables. One of our recent studies found that invoice processing costs alone were $5.39 per invoice, regardless of the billed amount. This includes the cost in creating and presenting the invoice, applying payment and resolving disputes. Other costs, primarily receivable carrying costs, added an additional 87% for a total processing and financial cost of $10.08 per bill.

The financial cost in processing a bill includes the cost in financing the receivable until payment is received, which can take anywhere between 38 to 79 days. Unfortunately, this significant financial cost is usually only recognized at the consolidated corporate level and not at the operating business unit level. The major components of financial cost include the carrying cost associated with days sales outstanding (DSO), and the closely related, bad debt expense. This combined cost, when left unmanaged, frequently results in a rise in working capital requirements especially during the current period of business expansion.

Effectively reducing DSO and improving the related bad debt expense can create a major reduction in financing costs, as well as a reduction in the company's overall cost structure. Several solutions to accomplish this goal include re-engineering the company's accounts receivables function; internally building process improvement automation tools; and shifting the company's target market mix percentage from wholesale to retail accounts.

Another alternative which is increasingly being utilized to lower the cost of billing with minimal business interruption is to partner with an outsourcing provider who has invested in automation solutions aimed at staffing companies' unique invoicing requirements. Such solutions rely on technology to improve the accuracy, speed and quality of the invoicing process and to efficiently lower both the invoice processing costs and the financial costs due to long DSO. One study estimates that by implementing an outsourcing solution, staffing companies obtain an overall 30% - 60% cost reduction in their invoicing process. Additionally, increased savings materialize over time for staffing companies in future years as outsourcers continually reduce the billing transaction fees by implementing future automation and process improvements.

Whichever solution is chosen to reduce the cost of invoice processing, a company needs to quantify the highly manual and visible bill processing cost along with the often hidden financial cost associated with carrying receivables much longer than warranted.

About API Outsourcing, Inc.

API Outsourcing, Inc. (API) is a leading provider of state-of-the-art billing and accounts payable automation solutions for staffing firms. Headquartered in St. Paul, MN, outsourcing services are delivered through onshore production facilities located in the U.S. API delivers services to transform clients' manual paper-dependent billing and accounts payable processes into innovative automated processes. The company currently processes over 200 million transactions annually. Clients benefit from the significant increase in process efficiency, profitability and financial control. API is a Six Sigma service provider. Please visit www.apioutsourcing.com or call 651.675.2600.

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