The thought of starting a temporary staffing agency can be both exhilarating and scary. Finding people to fill job openings has the potential to be very profitable when you take the right steps to ensure success. To do this, there are certain mistakes that you want to avoid.
It is common for start-up staffing companies to do things that can derail their business. Equally common, is not doing the right things to keep the doors open.
While the primary purpose of your staffing agency is to match candidates with job openings at various companies and collect a billing rate, your agency is also an employer. As such, you have all the duties, responsibilities and liabilities of other employers.
There are many legal and financial tasks that you need to line up before opening your doors. For starters, you need a set of formal documents known as Articles of Incorporation. It is important that these documents show pertinent details such as:
• Staffing agency name
• Physical address
• Agent for service of process
• Type of stock to be issued
It is never recommended to open a staffing agency as a DBA (Non-Corporate Status). There are benefits of owning a company as a corporation that can later protect your personal assets in case the company fails.
In addition, all documents you create for doing business must have the same agency name that is listed in the Articles of Incorporation. These include invoices, master service agreements, insurance certificate, EIN, and timesheets. This will be vital when you seek financing for your staffing agency.
Now that you have an idea of where to start, let’s take a look at some pitfalls to avoid.
1. Ineffective Service Contracts
Success is not written in the fine print of your service contracts. However, that does not mean that the contracts you have for your staffing agency cannot significantly impact the bottom line.
Contracts between you and clients can determine how much profit your agency sees. Insufficient or vague language can work against you. Getting sound legal advice from your attorney helps to ensure properly written contracts.
Doing so is particularly helpful if you need to secure additional funding. Some lending institutions may require contract information as part of your application.
The same is true for how you handle accounts receivable. There may be instances when you need to seek receivable financing to cover a new marketing campaign or payroll. Making sure your staffing agency flows from contract initiation to payment is crucial to keeping the doors open.
Your Contract must always spell out the terms of services, billing guidelines, and rates on a Schedule A for example. Rates can be updated anytime with the customer signing the new Schedule A sheet instead of sending 5 or 10 pages of contract to review. Anytime you have an adjustment of rates, it is very important your customer acknowledges in writing to avoid future charge backs.
Stay away from contracts that have a “Pay when Paid” clause. What this means is your customer is not obligated to pay the invoice until they get paid from their customer and then they add 10 to 30 days after that. Almost 90% of the payroll funding companies and factoring companies will avoid financing this type of invoice terms. A company that mandates a Pay when Paid clause is because they don’t have adequate cash flow to pay suppliers before collecting. Although it is standard contract terms in some industries, be sure to check the credit on the company first before placing temps on site and end up with a 75 to 120 day payment cycle.
2. Insufficient Funds to Make Payroll
Running a staffing agency means you are responsible for making payroll no matter what happens. This includes having enough funds to maintain employee payrolls even when you are not receiving revenue.
Let’s face it. Some clients consistently pay on time while others allow weeks or months to pass before they pay an invoice. Nevertheless, you must still pay employees, the utilities and vendors.
To keep you afloat during these times, you want to have enough cash flow on hand. Otherwise, it is very easy to fall behind when clients take longer to pay.
One way to fill the gap is with payroll funding. With this option, you can finance invoices to fulfill your duty of paying your employees on time. You can optimize cash flow operations while waiting for slow-paying debtors.
3. Risking IRS Audits from Hiring 1099 Workers
While you are taking care of payroll funding, make sure you properly classify employees and independent contractors. Overlooking this important distinction can have you sitting across the table from an IRS auditor.
Typically, classifying a high number of workers as employees mean you are paying more money in taxes and insurance. Misclassifying employees as 1099 subcontractors when state and federal agencies define them as employees can cost a lot of money.
At the state level, the workers’ compensation or unemployment agency may take a closer look at your records when a worker applies for benefits. Avoid this costly mistake by placing workers in the right category.
4. Starting Without Enough Working Capital
Because of the nature of the industry, it could take months before your staffing agency realizes profits. For this reason, you need plenty of capital to function as a business.
An under-capitalized staffing company will walk away from good opportunities. What other choice is there when a chance for growth gets hindered by not having enough money? Now is a good time to develop a relationship with a factoring company the funds staffing agencies
While every agency has different financing needs, you will most likely need more than your initial estimation. It never hurts to have a big cushion for the expected and unexpected opportunities for success.
5. Not Having Enough Money to Cover Quarterly Taxes
Another required business expense that you must prepare for is paying taxes. Do not make the financial mistake most agencies do by not setting aside money to pay the tax bill. This is one business expense that should not blindside you.
In a matter of time, it is easy to fall behind when you have not set aside money to pay taxes. To prepare for 941 taxes, you should have a substantial source for staying ahead.
Generally, you will have a ton of tax forms to keep up with but it is important to know what to do with each one. An example of this is 941 taxes. Also known as a quarterly federal tax return, form 941 is what your agency uses to report all FICA taxes owed and paid for the previous three months. You will use this form to report federal withholdings from your employees. Some staffing agencies are finding it more practical to subscribe to a reputable payroll service company to do all the payroll taxes. This eliminates extra staff with payroll obligations and provides more accuracy and timely credited payroll reporting.
6. Undercutting the Rates to get Business
Cutting your rates to get business early on can be an easy way to get attention. Remember that in order to put on more staff, and grow your business you will need a good profit margin. It is very difficult to increase rates later on and you should begin your business with a healthy gross margin.
7. Properly Classifying Employees for Workers Compensation Insurance.
Be sure that your workers compensation insurance is not putting everyone in one group, always research the positions and see if certain positions pay less than others.
8. Invoicing, Image Merging and Accounting System
Use an up to date online version of staffing software that delivers accurate invoicing to customers with rate table database, emails merged invoice with time sheets if required, profit and loss statements, calculates time totals for employees, and has ability to provide schedule of accounts to submit to factoring companies.
9. Look for Niche Industries
Specialized niche industries are always going to bring in more profit margins because there are less people to fill the gap. For example, if you call on the oil industry and offer welders, underwater welders bring in 10 times more revenue than pipeline welders. You have higher margins and higher sales.
10. Enhance the Success of Your Staffing Agency with Flexible Funding Options
As a newly formed and growing staffing agency, you are bound to make a few mistakes. There is a real-world learning curb no matter how well you plan and prepare.
One great thing about being in the early stages of a new business is to have a backup plan so any mistakes you might make do not shutter the doors. Funding options from 1st Commercial Credit is here to help you plan ahead.
Whether you just started or are approaching the one-year anniversary of being in business, 1st Commercial Credit is here to help with business expansion or other needs. We offer invoice factoring and payroll financing services that ensure your staffing agency stays open to serve clients with job openings to fill. We help small to mid-sized businesses as yours prepare to stay in a positive cash flow position as your company grows in credit sales. Call us today for a free no-obligation quote and consultation.