Prepare Your Staffing Company for a Cash Crunch

The staffing company-client relationship has grown in scope, as staffing companies are more integrated with their clients and the entire hiring process than ever. The key driver to the expanded relationship is that staffing companies streamline the hiring process and reduce risk and overhead by decreasing administrative costs, placing proven candidates and fulfilling temporary employment needs. This close relationship between staffing companies and their clients means that the staffing industry can be a leading indicator of a potential recession. In 2001, a net loss in daily placements for 10 months preceding the recession provided a strong predictive signal. Businesses typically reduce or eliminate both new hiring and their current staffing of temporary positions as budgets tighten, so a downward shift in temporary hiring can be an early economic indicator of an impending recession.

What Lies Ahead?

Data from the American Staffing Association shows a 2% drop year over year for staffing employment in April, followed by flat placements for the next three months — a trend that shows no signs of changing. After the 2008 recession, US staffing revenue declined 28% and more than a third of staffing employees lost their jobs. This shows the direct correlation between staffing company revenues and the growth and hiring practices of their clients. On the flip side, this direct relationship ensured that the staffing industry bounced back fairly quickly, reaching pre-recession highs in 2011, 2 to 3 years before many other sectors of the economy. By 2012, many staffing companies were already enjoying improved performance as the US economy overall was still recovering.

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Though no one can predict the road ahead, we can read the signs. The consensus between seven analysts at Forbes is that a recession in the US economy is likely to occur sometime between the end of 2019 and 2022. While the analysts all agreed that a recession was indeed coming, their opinions differed as to when. Since nobody can predict the market with 100% certainty, the key to planning for a recession is having contingency plans in place for any circumstance like an economic shift, a natural disaster, or a regulatory change that causes an unexpected drop in revenue.

Planning for the unexpected. Contingency planning can be difficult because it is so abstract. For the majority of the plans business owners make, they know the exact circumstances, time frames, and costs involved. They can accurately predict the effects planned changes will have on their business and have a good understanding of the overall picture. Contingency planning, by necessity, must encompass a wide range of possibilities, time frames, and impacts, all of which have to be accounted for.

Stay agile to deal with change. A key part of contingency planning is to keep your business agile by keeping your overhead low. This is a way of armoring yourself against the unexpected. By outsourcing certain services that can scale with your client base, you can keep costs low and be more flexible should revenues decline. Outsourced services are often more efficient dollar-for-dollar than salaried staff when it comes to tasks like sourcing, screening, and administrative support.

Limit your reliance on one industry. Work to build a diverse and robust client portfolio that spans industries. Staffing companies with a broad client base are better able to insulate themselves from sector-specific downturns. Construction, business services, and financial services were some of the worst-hit in 2008. Spreading your exposure beyond a single industry helps ensure you have the best chance at maintaining revenues.

Plan for a drop in revenue. Most businesses can’t withstand a 30% reduction in revenue next month. Sufficient cash in reserve is the primary bulwark against any unexpected loss of revenue. Update your company’s books and ensure all of the information is accurate and take this opportunity to write off any old, uncollectible invoices. Contingency planning requires that you understand the cash flow needs of your business and make sure reserves are in place.

Have a funding partner before a cash flow emergency. Contingency planning should also include engaging a funding partner for any short-term cash needs. Do your research and consider the pros and cons of all your options. While a bank line of credit provides access to cash, an alternative solution like invoice factoring provides greater availability against your receivables without weighing you down with debt. Many alternative financing resources will also support your business with accounts receivable management services which will reduce administrative overhead.

After surviving the recession it will be critical to ensure you have enough working capital to maintain payables and allow for growth in the business when the economic recovery starts. The best contingency plans and funding solutions are different for every business. However, what is true for every business is that it is always best to have a plan and a strong funding partner before you need them.

The Time to Plan is Now

It doesn’t matter if the cause is economic, political, or natural disaster — the biggest key to enduring any unexpected drop in revenue is to have a plan ahead of time. Attempting to understand the business’s cash obligations, collect late invoices, or find cash funding at the last minute is always difficult and never cost-effective. By having a sound plan in place and a clear picture of your business’s needs at all times, you can ensure that your staffing company will be able to weather a recession handily and grow exponentially in the recovery period to come.

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