Improve Your Financial Management Practices to Elevate Your Staffing Business

A financial gap is discovered when a company compares its actual financial data to its budgeted or projected data. Financial gaps can lead to problems for businesses, such as missed payroll, late payments to suppliers, and lack of flexibility for investment in the business. Financial gaps can be caused by many factors, but improving your financial management practices can help identify these gaps quicker and thereby allow you to mitigate some of these issues and lead to higher business performance.

Causes of financial gaps

Our staffing specialists have identified four common causes of financial gaps and have determined how those causes happen.

Overdependency on key customers

The first cause we’ve identified is overdependency on key customers. Overdependency on key, typically large, customers can lead to missed sales targets that can cause a financial gap. The problem can lie in redeployment efforts that lead to lower sales and missed financial targets. Another byproduct of overdependency on key customers is margin compression. Larger customers typically squeeze a business’s margins, and that margin compression can cause financial gaps. These financial gaps can be reduced in a couple of ways. The first is evaluating redeployment efforts to ensure they are properly managed. Can a temporary employee be redeployed in a different role for the same company, or can they fit into a similar role with a similar client? The second is to decrease reliance on large customers by realizing that client diversification is important.

Inconsistent management of margins

Poor margin management is another common cause of financial gaps. Larger clients or customers typically control negotiations, leading businesses to accept the terms provided to them rather than terms requested by the staffing agency itself. This negotiating pressure can lead to poor margins, undermining the margin management process and eliminating leverage for future negotiation with that customer. Blind acceptance begins to create a financial gap very early on in the relationship. Companies need to have internal margin standards and better understand the cost of providing the services requested at reasonable prices to avoid the risk of underpricing.

Poor liquidity management

Liquidity management guides important financial decisions and creates more accurate financial analysis and forecasting. The first aspect of liquidity is availability. How much cash is on hand and how much will you need? Supplementing your cash flow with a line of credit is commonplace. The second aspect of liquidity is its management, which lies in the collection of receivables. Average accounts receivable turnovers for the staffing industry are 45-50 days. Monitoring the collection of this is critical so those receivables don’t start to age and cause larger issues. Since staffing companies typically operate in specialized sectors, your turnover ratios will vary by sector.  For example, Healthcare collections can extend 70-90 days on average.

Inadequate financial forecasting and planning

In our experience, staffing companies don’t always have the resources for robust financial forecasting or planning. Lacking the talent and expertise to form a proper forecast is the first cause of this financial gap. The second is when a proper budget and forecast are created and then ignored. It is critical to look beyond the current state to identify potential issues.

Identifying financial gaps

Now that we’ve understood what causes financial gaps, it is equally important to understand how they are identified. We recommend running monthly budget-to-actual comparisons to see why a missed target and a financial gap occurred. There are several key ratios to evaluate, including sales concentrations, low margin contracts, and days sales outstanding reports, which are tasks that should be performed on a regular basis to help identify financial gaps. Benchmarks can be used to measure your performance against industry standards to get an idea of how well you are performing compared to the market.

Fixing the gaps

Knowing the cause and understanding how to identify financial gaps are half the battle. The next step is fixing those gaps to improve your business performance. An added focus on collections of receivables and watching your aging receivables, and then having a process in place to escalate them to a senior manager or officer to prevent them from spiraling into a major issue. Effective internal standards around pricing, margins and markups will allow staffing companies to improve their margin and liquidity management to prevent financial gaps or reduce their impact.

Our National Staffing Practice assists staffing companies of all sizes in various sectors with financial management and other advisory services. Fill out the form on this page if your business needs guidance or insight to improve business performance.

05/22/2024