Staffing Agency Financials: Interpreting the Data Results
Steve Capper – Flexible Funding - July 17, 2017
What are the operating/financial norms for a U.S. staffing agency? How does your agency’s performance compare with others? See the data here, and the explanation below.
The RMA Risk Management Association takes all the staffing agency financial statement data –assets, liabilities, and income
–from numerous samples they receive and calculates financial ratios, using simple math. The details of accounts receivables turnover ratios that payroll funding companies tend to focus on are explained in our “Analysis of Accounts Receivables & Financials for Payroll Funding” article. The RMA then lists out all the ratio results from the strongest to the weakest. (In interpreting ratios, the “strongest” or “best” value is not always the largest numerical value, nor is the “weakest” always the lowest number.)
The large list of values or ratios, listed from strongest to weakest, are then divided into four groups of equal size. The median or midpoint is found, where half of the list values fall above it and half fall below it. In the “RATIO” results (see capped bold “RATIOS” heading starting at the center of the data page almost halfway down the data page), the median-midpoint of the ratios are represented in darkened or highlighted horizontal bands.
The figure listed just above each banded median-midpoint represents halfway between the median midpoint and the very strongest ratio. And the figure just below the banded median-midpoint represents halfway between the median figure and the very weakest ratio/performance for staffing agencies.
Looking at “Current Data Sorted by Sales” headline at the very top of the RMA data page, examine the second data column from the left (yellow column). In bold near the top, this shows you that this column represents figures for a staffing agency doing 1 to 3 million in sales (1-3MM). Follow this second column down to the Sales/Receivables ratios (green row) and you will see the median/midpoint of 9.0 turns per year of the accounts receivables. (Staffing agency receivables turn 9.0 times per year when the accounts receivables are performing at the midpoint between the strongest and weakest performances.) Above the 9.0 ratio figure you can see that a company with strong accounts receivables turns 16.0 times per year (which is half way between the 9.0 median and the very strongest number). Below the 9.0 figure, you can see that a company with weak performing receivables turns 5.3 times per year (which is halfway between 9.0 and the very weakest number).
Now look just to the left of these figures (9.0, 16.0, 5.3) and you will see three figures in bold (41, 23, and 69). The bold figures represent the number of days it takes for receivables to turn, or get paid. (This is not the number of times the A/R turns in a year.) The median midpoint of 41 days is listed in bold type in the median darkened/highlighted band. A company with stronger performing accounts receivables would be paid closer to 23 days, and a company with weaker performing accounts would be paid around 69 days.
(Note on unusual figures: In a small company doing under one million dollars of annual sales (the far left column of “Current Data Sorted by Sales”), “UND” as the Sales/Receivables ratio stands for “undefined”, the result of the denominator in the ratio in the Sales/Receivables ratio calculation approaching zero. The denominator in this Sales/Receivables ratio calculation is the trade receivables owing to the staffing agency– and there are no significant receivables in such case. The only time a zero will appear in the list is when the Sales figure is too low and the quotient rounds off to zero.)
Flexible Funding as a commercial lender providing payroll funding exclusively for staffing agencies, receives financial and operating field reports from dozens of staffing agencies daily. Be aware of the following reported market conditions that may need to be adjusted for in the RMA data results:
- When an agency provides temps to an end user through a middleman organization/computer system known as VMS Vendor Manager or MSP Managed Service Provider, the accounts receivables tend to turn or pay slower, and the performance ratios tend to be weaker. It takes more time to get paid because the end user of the temporary employees takes time to pay the VMS/MSP middleman, and then the middleman generally takes extra time to pay the staffing agency. Because the middleman also takes a percentage of the profit, more VMS/MSP in your business mix usually translates to lower “profit before taxes”. (About 50% of staffing dollars with very large national customers are now running through VMS/MSP, and payments from many of these organizations pay at 60 days and beyond.)
- Industrial or light industrial staffing labor is very competitive and is often done at a lower markup/margin, especially in larger metro areas. These industrial accounts would be incorporated in the RMA figures to an extent. However, if industrial labor is a large portion of a staffing agency’s volume (versus IT, nursing, engineering, highly skilled labor, or higher markup niches) it will tend to lower the “Profit Before Taxes”. Conversely, if you do little general industrial staffing business and do more skilled specialty niche staffing, the Profit Before Taxes will likely be higher (5% to 7%) than what is reported by RMA.
- Some staffing agencies in their startup phase actually lose money because they feel they need to “get a foot in the door” at an account, and do so by initially working with VMS/MSP middleman with not enough margin to make a profit. After payroll funding or payroll financing costs are included, one may find the margin/profit is even lower than first calculated. And some staffing agencies in the $5-$10 million annual sales range, and higher volumes, have a slightly lower Profit Before Taxes than listed because they go into low markup/margin deals feeling they can “make it up on volume” but eventually find out that they really don’t (but stay in the deals anyway).