Staffing blog

How to Set Up Your Staffing Agency to be Profitable

By 08.18.21November 29th, 2021No Comments

In general, temporary staffing companies run net profits ranging from 3 to 10 percent, depending on the industries served, local conditions and clients’ special service requirements. According to analysis, the largest temp staffing companies earn an average net profit margin of approximately 5 percent.

The National Industrial Conference Board forecasts that 2021 GDP growth will rise to 7.0 percent (annualized rate) in Q3 and 6.0 percent year-over-year. This growth is a turnaround year for some hard-hit industries resulting in the growing demand for job placements. 2021 is fertile ground for staffing companies to grow their business and generate solid profitable returns. With anticipated continued GDP growth of 4 percent in 2022, and 3 percent in 2023, the next two years are expected to continue the push for growing employment demand. To best position your staffing agency to be most profitable, be sure to set a competitive yet sustainable rate, manage business costs well and ensure you have a reliable payroll funding solution in place.

How to set a Competitive Bill Rate
The bill rate is a simple addition of the employee’s pay rate plus your agency’s markup. There isn’t a set rule for pricing your staffing business as there are too many variables to consider. To determine the markup you can earn on particular job placement, you need to consider the following factors:

  • Competition: It stands to reason that the more competition in your market, the more your billing rate needs to align with industry norms.Still– the markup range is wide, varying from 15 percent to 100 percent depending on the type of job placement services being delivered. There are vast differences in providing unskilled temporary, professional temporary and, skilled permanent placements.The placement of entry level temporary workers may dictate lower markups, whereas placing highly skilled labor can allow for markups ranging from 50 to 75 percent and, in some cases even more. Do your market research carefully to understand the going rate in your local area.
  • Client Relationship: Retaining existing clients is essential to the sustainability of your staffing agency – providing special rates to long-term clients is an incentive to be seriously considered. The same applies to clients who provide high volume job placements.
  • Industry Sector: Typically, niche markets such as IT and engineering produce higher markups when compared to administrative positions such as clerical office workers. It is not unusual to apply a markup of 70 to 75 percent for skilled professionals in IT.
  • Local Standards: The market your staffing agency services will have a significant impact on the markup your staffing agency can apply to the rate. For example, markups for industrial workers in the Indianapolis area range between 26 to 50 percentbut are higher in Chicago.

The bill rate is the amount that your staffing agency charges the client per hour for both your agency’s services plus the services of a contingent worker. Subtracting all business costs from the bill rate provides your staffing agency’s net profit.

Account for all business costs
Successful staffing companies have a keen understanding of the business costs and other factors that impact their bill rates.. Before quoting a bill rate to your client, take the time and effort to identify and factor in all costs, both direct and indirect. The actual cost of placing and paying an employee is typically 1.25 to 1.4 times their base salary.

Ensure the bill rate for whatever type of placement you do provides you with enough overage to cover payroll, overhead and all business costs associated with those employees. These costs include:

Burden rate
The burden rate consists of indirect and incidental costs associated with hiring and retaining employees over and above gross compensation or payroll costs. Typical costs associated with the burden rate include payroll taxes, workers’ compensation, health insurance, paid time off, training, travel expenses, vacation, sick leave, pension contributions, and other benefits.

Statutory Expenses
Unavoidable expenses are taxes and other costs required by law – these are referred to as statutory expenses. These costs include:

  • FICA taxes
  • Federal and state unemployment insurance taxes
  • Worker’s compensation insurance
  • Healthcare
  • Additional state and local taxes

Miscellaneous and discretionary costs
These are additional costs associated with hiring and employing staff that include but are not limited to background checks, 401(K) contributions, and more.

Be sure to account for all costs associated with placing and retaining staff members to accurately determine a billing rate that leaves a healthy profit after all expenses are paid.

How to ensure reliable payroll funding
Placing well-qualified applicants in job positions is just half the job for temporary staffing companies – meeting payroll accurately and on time is equally as important to the success of your staffing agency. This process becomes a cash flow problem that needs to be solved and implemented.

Typically, a staffing agency provides services and bills the client at the end of the month with 15 or 30 days of payment terms If the client pays on time, revenue is collected weeks after the staffing agency has expended working capital to cover employee wages. This time delay causes a cash flow gap – if the client pays late, this gap to receive cash extends even longer! Unless your staffing agency is well endowed with a healthy cash surplus, managing this shortfall is unsustainable. To avoid this scenario, a growing number of staffing companies are turning to invoice factoring to make payroll and pay business costs.

What is invoice factoring?
Invoice factoring is the practice of selling invoice receivables at a discount in exchange for immediate cash. This simple financial strategy creates positive, reliable cash flow that bridges the financial gap between invoices sent and revenue received – this gap is otherwise known as Days Sales Outstanding (DSO).

How does invoice factoring work?
It’s a straightforward funding arrangement:

  • Your staffing agency invoices the client and forwards a copy invoice to the factoring company.
  • The factoring company verifies the invoice and transfers up to 90 percent of the invoice face value directly to your account within 24 hours (often within the same day). The balance owing is held as a reserve while the factoring company waits for payment from your client.
  • Your client pays the full amount to the factoring company. The reserve is lifted and the remaining balance is transferred to your account. A small factoring fee is deducted, and the transaction is completed.

With cash flow accelerated to under 24 hours, staffing companies can easily manage the fiscal obligations of meeting payroll with enough working capital left to pay bills and fund growth.

Invoice factoring allows temporary staffing companies to service clients and invoices them with competitive payment terms yet maintain steady, reliable cash flow. By providing immediate access to working capital, these companies can meet financial obligations on time, bridge cash flow gaps and fund growth. The greatest advantage of using invoice factoring is that credit limits grow as your business grows – the more invoices you produce, the more funds become available. Invoice factoring is the ideal financial solution to grow your staffing agency and support increased profitability.

For more information about using invoice factoring to support operations and increase profits, visit eCapital.com.