Cashflow and welfare-to-work provision

Cashflow is the amount of money being received and spent by a business in a period of time

As the recent failures of Instant Muscle and Carter & Carter attest, many companies in the welfare-to-work industry have been facing problems in recent times. Some smaller providers have already fallen by the wayside (e.g. Olympian) or been absorbed into larger ones (Fern, Maatwerk) in recent years. The Jobcentre accredited provider list in 2002 numbered just over 1,000 organisations. Today it's 500, and that looks set to shrink substantially with the advent of Prime Contracting in both mainstream and ESF provision. While some of these providers will find niches subcontracting to the Primes, consolidation is a key trend in the coming years.

One of the factors influencing this is simply the increasing cost and financial risk of delivering welfare-to-work provision. Changes in the payment structure will substantially change delivery cashflow compared to previous New Deal delivery.

To demonstrate the impact of the changes, we've put together a financial model for flexible New Deal. It's attached as an Excel spreadsheet at the bottom of this article. If you're thinking of bidding for Prime Contractor something far more complex will be required, but it provides a useful illustration of some key points:

  • It will take lots of cash to set up provision - In the model, a £10m provision needs £2.5m in capital.
  • You won't see the cash back for a few years - The model shows a break even point of almost 2 years, but a lower profit margin could extend this by another year or more.
  • Falling short on job outcomes will cause a double hit - If you only get 90% of the job starts, then you can only expect 90% of the sustained job outcomes.
  • All the cells in blue in the spreadsheet can be edited so you can see the impact of different figures, and of under- or over-performance against target. The base profit margin can't be changed yet, but we might put that in later. Play around with the 'actual' outcome figures and you'll soon see what financial risk translates to.

Given the state of lending at the moment, it's conceivable that many companies will have difficulty in raising the finance needed to set up provisions of this size. The size of each contract means that medium-size providers may only be able to take on a single area, potentially betting the entire company on a single delivery.

Opinions? Questions? You can log in and edit the article or add a comment to it!