When managed correctly, temporary staffing agencies can grow quickly and be very profitable. They represent a great opportunity for the right individual (or group). However, agencies have a lot of moving parts. They need owners/managers who have expertise in many areas.
1. The basics: How does a staffing agency make money?
Temporary staffing agencies lease employees to companies that need staff. They make a profit by paying the employees less than what they charge their clients. Margins vary, but can range from 30% to 70%, depending on industry, supply, demand, and location.
Many companies like to work with staffing agencies. Agencies provide employees on an “as-needed” basis. Companies (clients) can ramp up resources when needed. The leased employees require minimal overhead and can be dismissed when not needed.
Employees also like temporary staffing agencies. They provide new opportunities and a flexible work environment. They can also be stepping stones to permanent positions.
2. Start and grow the business
In this article, we discuss the basic steps to start and grow a successful staffing agency. Following these nine steps will help you start and steer the agency in the right direction.
Step 1: Evaluate your skill set
You must have four specific skills to be successful in this industry. You must know how to:
- Find employees
- Find clients
- Match clients and employees
- Manage personnel/employees
All of these skills are equally important. If you don’t have one, your company will fail. Examine your skill set and determine if there are any gaps. Fill any gaps by hiring (or partnering with) the appropriate people.
Step 2: Support the right industry
A major component of running a successful agency is supporting the right industry. Examine the market needs and ensure that your company fulfills them. Understand the supply/demand cycles of your selected industry.
Generally, the staffing industry includes three segments:
- Office/clerical
- Industrial
- Professional/technical
However, focusing on an industry segment is not enough. Develop a very specific niche within your selected industry category. It’s easier to start within a small sub-specialty and grow from there.
Step 3: Determine startup costs
Startup costs can be divided into two categories: establishment and operational. Establishment costs are the costs needed to setup your basic business. Many of these are one-time costs and must be paid before you can take on your first client. They include:
- Legal setup expenses (entity formation & contracts)
- Computers
- Software (HR, accounting, payroll, testing, and training)
- Office (if you need it)
- Insurance
Operational costs are the costs you pay to find employees, clients, and to deliver your first months of services. Generally, higher-skilled job assignments require higher startup costs because salaries are higher, testing needs are more complex, and you must present a polished image.
Step 4: Understand an agency’s cash flow
A common mistake new agency operators make is failing to understand cash flow. In the staffing industry, you must pay your employees every week or two weeks. Your clients, on the other hand, pay you every 30 to 60 days. This delay can create a problem if not managed properly.
Let’s illustrate this problem with a simplified example. Assume a startup agency has $3,500 in the bank and a contract to lease two employees. The agency pays $1,200 in weekly salaries to both employees. However, the agency invoices the client $1,700 a week for this service. However, as it is common in business, the client pays the invoice on net-30 days. Let’s examine the cash flow.
| Item | Week 1 | Week 2 | Week 3 | Week 4 | Week 5 | Week 6 | Week 7 |
|---|---|---|---|---|---|---|---|
| Salaries | $0 | ($1,100) | ($1,100) | ($1,100) | ($1,100) | ($1,100) | ($1,100) |
| Client Invoices | $0 | $1,700 | $1,700 | $1,700 | $1,700 | $1,700 | $1,700 |
| Client Payments | $0 | $0 | $0 | $0 | $0 | $1,700 | $1,700 |
| Available Cash | $3,500 | $2,400 | $1,300 | $200 | ($900) | ($300) | $300 |
Note: Table can be scrolled left/right on mobile devices. Tap on screen if scrollbar does not appear.
Things start off quite well at the agency. The first three weeks are uneventful. The agency pays employees and invoices clients normally. Problems start in week 4 when the company does not have enough funds to handle payroll. The company can miss payroll or underpay employees. Both are bad options.
Client payments begin at week 5. At that point they can finally finish paying employees for week 4. However, the agency will have to short pay employees for week 5.
Things finally stabilize at week 6. This situation gets more complex and urgent if your agency grows quickly.
It’s not uncommon for sales to get ahead of cash flow. If the situation is not managed properly, the results are cash flow problems, missed payroll, tax liabilities, and failure.
Step 5: Determine where to find your employees
Finding employees is hard – very hard. Before contacting candidates, ask yourself, “Why someone would want to work with my company?” Why are you different and better than your competitors?
If you don’t have a good answer, don’t proceed. Fix the issue first. Differentiate yourself from other staffing agencies.
You can recruit employees though the usual means. You can use job boards, LinkedIn, contacts, referrals, and so on. There is one catch, though.
The problem is that everybody does those things. Unless you work a very specific niche, you will have a lot of competition. You need to be very creative and use non-traditional recruitment means. Specific tactics vary by industry.
Step 6: Find clients (marketing and sales strategy)
Much like finding employees, finding clients is also very hard. There is a lot of competition. From a client’s perspective, your company is “just another staffing agency.”
Why should clients work with you – instead of with competitors? What makes you different? Better? Do not look for clients until you have good answers for these questions.
The common places where staffing agencies looks for clients include:
- Internet
- Newspaper
- Trade publications
- Word of mouth
- Networking
- Cold calling
All these methods are fine. The problem is that everybody uses them. You will be hard to spot in a crowded and competitive market.
Develop creative ways to get in front of potential clients in your selected industry niche. But that is only half the work. You must develop a competitive value proposition to work with you. What can you give them that your competitors can’t?
Step 7: Get a payroll service
As a factoring company, we get calls from many staffing agencies that need funds to cover payroll. During the due diligence process, we often discover that the company has not done payroll correctly. The most common problems are improperly withheld or forwarded taxes.
By the time they reach this point, it’s often too late. The firm usually has tax liens in place and is too deep in problems to be saved.
You can avoid many of these problems by working with a payroll service. This point is critical. It will save you a lot of headaches. Many good payroll services provide competitively-priced offerings. Get a payroll service before you get your first employee.
Step 8: Get proper insurance
Staffing agencies need a lot of insurance. We are not insurance experts. Consult an insurance agent that specializes in the industry. Here are some of the policies you may need:
- Commercial general liability (CGL) insurance
- Employee theft and crime coverage
- Employment practices liability insurance (EPLI)
- Professional liability insurance
- Workers’ compensation
- Property coverage
Step 9: Handle the initial cash crunch
As discussed in step 4, understanding your company’s cash flow is critical for success. Cash flow is most strained at your most critical times: when you are starting or growing.
Get an adequate emergency fund before you start the business. If you cannot get a reliable cash cushion, consider using a payroll financing service. Also known as factoring, payroll financing can advance funds on invoices. This advance provides funds to meet payroll expenses, grow the business, and avoid cash crunches. You can learn more here.
Need payroll financing?
We are a leading provider of payroll financing to temporary staffing agencies. For an immediate quote and call back, go here. Otherwise, call (877) 300 3258.