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The Finances of the Staffing Industry

I have written a number of blog entries designed to educate people about our industry, its value and some of the misunderstandings people have. Recently I have been asked about the costs associated with operating a staffing agency and have actually seen supposed "experts" providing erroneous data to their clients.

One of our potential clients was incredulous that our margins were "exorbitantly high". They were of the opinion, based upon input from their "experts" that we had no cost base and that our margins equated to profits. Unlike may industries the staffing industry operates with very low profits, both Statistics Canada and Staffing Industry Analysts have published papers showing that Staffing industry profits are in the 3 to 5% range.

So ... if we have such exorbitant gross margins, how do we end up down at those kind of profits? First and foremost the "Cost of Sales" in the agency business is the cost of the contractor. Typically there is a mix of business between "regular" margin business and very low margin "payrolling" business, together they can drive overall company margins down into the mid teens. So 85% or more of revenues gets paid out to the consultants BEFORE the agency even receives payment from the client.

Keeping things very simple, working with 15% or so of revenues we now have Sales, General and Administrative costs to deal with followed by taxes.

1. Salaries ... by far the largest cost to any agency is the salaries and bonuses of the staff. this includes sales people, recruiting staff, accounting staff, technology people, marketing, proposals, HR and administrative help. Anybody who runs a company today will tell you that salary costs go up every year, even when the client squeeze on margins gets tighter!
2. Infrastructure ... like any company we need office space, technology, networks, phones, marketing costs, costs associated with proposals etc.
3. Financing ... the agencies have a large "payroll" of consultants/temporary employees to fund each month and as we know clients have been pushing out payments such that net 45 day payments are becoming the norm and even 60 day payments are not rare. This requires the agency to finance the payroll costs.

Typical S,G&A costs might approximate between 10 and 15% of revenues depending upon the size and nature of the agency.

If we use 12% SG&A then our fictitious staffing agency has a net income before taxes of 3% of revenues. The taxman always like to get his piece of the pie and hence the end result to the shareholder is very skinny indeed!

Increases in interest rates, a recession, a lawsuit (frivolous or not) or loss of a key client can cause big issues when the profits are so slim. The staffing company owners are entrepreneurs who take on these risks and every time there is a recession we see many companies disappear.

If you are evaluating staffing companies and looking for best "value" then the best advice I can give you is to focus on what you pay for the contractors and temps, not on the margins of the staffing company. If you are paying the best price in the market why would you care about the agency markup, there are certainly no major agencies making out like bandits!