When it comes to making more of a profit in staffing, “sell more” is not always the answer. First off, easier said than done! And secondly, it can actually hurt you in the long run if you under price yourself to win a high volume contract. That strategy almost never works out because if you’re providing your services at a losing rate it does not matter how many positions you fill - it’s still a loss.
1. Improving your Gross Margin
When we think about ways to increase profits, we usually think about lowering operating expenses or increasing sales. In fact, for many staffing firms the fastest path to higher profits is higher gross margins – aka amount of money a staffing firm gets to keep after paying the temporary workers payroll, benefits, payroll taxes and other statutory expenses. Many staffing firms leave gross margin on the table by paying temporary employees above market and/or charging customers below market rates.
It is in your interest as a staffing firm owner to express the importance of negotiating an optimal bill rate and pay rate to your sales team through bonus incentives, extra training, or even “gamification” of sales – i.e. making sales function like a game in order to motivate participation, engagement, and loyalty.
2. Uncovering Hidden Costs in Contracts
Profitability begins in the details because when your margins are tight, dollars and cents add up! When reviewing a contract of a potential customer, it is not enough to skim it over. “Hidden” costs in contracts can add up and ultimately impact your bottom line in ways you might not expect. Here are a few hidden costs to look out for in staffing contracts:
- A large quantity of holidays or unpaid days
- Extra cost for background checks
- Unreasonable additional insurance requirements such as very high general liability coverage
- Tight overtime restrictions
- Discounts in VMS contracts
Bottom line, review your contract very carefully before agreeing to anything! Little costs can add up and affect your profit margin.
3. Collecting Your Payments Faster
Collecting on outstanding invoices faster is one way to increase your cash flow and ultimately affect your profitability. Here are a few tips on how to speed up the process.
- Set (or negotiate for) favorable payment terms. If you are waiting 45, 60, 90 days for invoices to be paid, it might be time to consider reworking your A/R structure so you reduce the days until you get paid. If your customer is unwilling to negotiate terms, you may be able to suggest implementing a late fee if they pay past their scheduled term.
- Invoice your customers promptly. The sooner they get the bill, the sooner they can pay you! Consistency is key – set a schedule and stick to it.
- Outsource your collection calls. If you have a full service partner, let them do the work for you when it comes to collecting overdue payments.
- Gently remind clients that temp payroll is still payroll. Payroll is always paid first as an expense for any company. Why should your invoice for temp payroll be treated any differently?
4. Controlling Workers' Compensation Claims
One way to impact your profitability is to control what you can when it comes to Workers’ Compensation claims that come right off your bottom line. Not everything is in your control, because ultimately the safety of your worker depends on your customer’s work site. However, there are steps you can take to protect your workers and your firm. Namely, having a Workers’ Compensation policy, doing general health and safety training, and having a process when a claim is filed that includes follow through and aggressive monitoring. This can include timely reporting to insurance, ongoing communication with claimant and insurance adjuster, and putting the claimant back to work in a different capacity.
5. Reviewing Your Current Portfolio
When it comes to profitability, a diverse client portfolio is one way to mitigate risk and strengthen your margin. When reviewing your client portfolio, ask yourself these questions: Is your revenue concentrated in 1-2 big clients? What industry do they come from? What is their revenue? Doing an analysis of your current customers can help you choose future orders strategically and know when to say “no”. While you want to maximize profits, you must sometimes say no to orders that risk creating losses. Staffing firms are wise to exploit the long-term trend toward filling skilled positions with contract labor, in the tech industry and beyond.
Plus, an added benefit to analyzing your current clients is to note if any of your old clients have not been touched in a while or have not used your services. That way you can follow up immediately or a schedule a time to touch base.
In our years of experience helping staffing firms grow, we have seen what it takes to be successful – and also where staffing firms make the most missteps. If you have any questions about profitability or growth, please contact us!
About the Author
Barb Hammerberg, CCWP, is the Director of Client Development at Advance Partners. Barb has held almost every job that exists in staffing firms, including recruiter, branch manager and regional director at Robert Half and several director roles at the corporate level for Manpower. Her real-life experience with staffing companies gives her the unique ability to connect with and help clients in a very real way.