Recession Proof your Staffing Firm
Are you concerned about your staffing firm’s financial footing? Against the backdrop of an uncertain economy and recession predictions, you’re not alone.
While few businesses are entirely immune to changing economic conditions, there are several tactics you can employ to protect your company in a downturn.
Sheri Tischer and Dan Eichstaedt, both with TCI Business Capital, presented a webinar to TechServe members in which they covered these tactics. Here you’ll find strategies that can help your staffing firm navigate the economic uncertainty and emerge stronger than ever.
Having too many eggs in one basket is risky. Tischer says that no single client should account for more than 20% of your total revenue, pointing out that according to Forbes, the number is even lower at 10%.
Whatever the percentage, diversification makes sense. It protects your business against the possibility of losing a single large client’s revenue. It guards against a downturn in a specific industry. And it positions your business more strongly for an exit.
Diversification can mean different things for different businesses. You might target different industries – particularly recession-proof ones such as healthcare, education, and food processing. You also might consider expanding into a new geography or adding services to your portfolio of existing services.
For companies interested in diversifying, Tischer and Eichstaedt offer a five-point plan:
- Analyze your client portfolio. Determine where your business is most profitable, and where the best opportunities for growth are. Focus your efforts there.
- Create a diversification plan. “This doesn’t mean just talking about diversifying, and then hoping that it happens,” Eichstaedt says. “It’s setting goals and objectives and collaborating with your team.” Identify the right prospects for your business and create a concrete plan for targeting those companies.
- Add services to your portfolio. Consider adding complementary solutions to those you already offer your clients. If you do, ensure that it’s sustainable by resourcing it appropriately. “Whether you’re talking about adding a direct hire program, an MSP, or something else, it needs to be a dedicated team,” Tischer says. “Everybody’s busy enough focused on their daily tasks. Make sure someone is specifically focused on that, and you’re going to end up with much better results.”
- Commit to new business development. Put it on your calendar and invest time every week in new sales development.
- Consult with experts. Work with partners who know the staffing industry and can support you with diversification strategies.
Training and development
Top performing companies provide their employees with opportunities to grow and develop professionally. Smart companies go beyond ‘product knowledge’ training, offering opportunities for employees to learn skills and competencies outside of their basic job responsibilities. And this investment pays off. Studies have shown that training results in higher productivity and lower turnover.
When it comes to withstanding recession, training is even more important. Broadly cross-trained employees are more flexible, allowing the business to be more agile in challenging times.
Whether training is handled internally or outsourced, formally in a classroom setting or informally one-on-one, Tischer and Eichstaedt suggest seven areas of focus that can help create a more resilient workforce and business:
- Conflict resolution
- Time management
- Stress management
- Emotional Intelligence and StrengthsFinder
Improve cash flow
Cash is the lifeblood of any business. For staffing companies, payroll expenses are an especially acute risk factor when it comes to the movement of cash in and out of the business.
The risks are real. “Working capital or cash flow is obviously my world,” Tischer says, “and one stat that jumped out to me was by US Bank. They said that 82% of small businesses fail due to insufficient cash flow. That’s a startling number.”
To help your business avoid becoming one of these statistics, Tischer and Eichstaedt offer six tips:
- Understand your payment terms. Whether your terms are standard across your client roster, or tailored to each; whether your terms are net 15, net 30, or something else, are they working for your business? If not, begin correcting the situation with all new clients, and existing clients where you can.
- Work your aged receivables. Ensure that there’s a person assigned to this task, and that it is done every week. Build strong relationships with your Accounts Payable contacts, treating them as well as you treat your hiring managers. Watch payment trends over time so you can respond if they’re changing.
- Adjust your pricing models. Have a process in place for standard rate increases on a regular basis. Additionally, consider using labor market data to support tailored pricing models, charging higher rates for positions that are harder to fill.
- Focus on filling the ‘right’ orders. To the extent, prioritize working with clients that are employers of choice, offering competitive compensation, and with a good payment history. Align your sales team with your recruiting team, focusing on getting orders for positions where your recruiting team excels.
- Expand your business. Consider adding new services to your portfolio, expanding into new geographic territories, or expanding the types of skill sets for which you recruit.
- Pursue financing. Your business needs healthy cash flow to operate. Understand your financing options well and have them in place before you need them.
Know your financing options
Whatever the options you choose, Eichstaedt says that timing is key. The sooner you know you need financing, the more options that will be open to you, and the better the terms.
There are four primary sources of business financing, each with their own pros and cons.
- Self-funding. Using your own savings, or money from friends and family, to keep the business a float.
- Pro: There are no fees or interest when using your own funds.
- Con: It can be stressful to see your savings (or those of family and friends) becoming depleted when cash is tight.
- Bank line of credit
- Pro: It’s a safety blanket you can use when you need to, and you don’t pay fees when you don’t.
- Con: These are difficult for a new company, without 3 years in business or security to offer, to access. The funds also come with very close oversight by the bank.
- Merchant Cash Advance
- Pro: Funds are not difficult to obtain and offer the fastest access to cash when needed.
- Con: This type of financing incurs very high costs and is therefore not sustainable in the long term.
- Payroll funding / Receivables financing
- Pro: Cash is available quickly, often within days. Lenders typically offer flexible terms with no long-term commitment.
- Con: There are minimum volumes; companies typically won’t fund just one invoice.
Navigating the current banking environment
In the current economic climate, it can be challenging for companies to access bank financing at terms that make sense for your business. Interest rates have roughly doubled over the past few years. And with the threat of recession, banks’ lending policies are more conservative. Tischer and Eichstaedt say they expect this tightening to persist for the next two years.
It’s important to understand the risks to your business, and the opportunities. Remember the FDIC limit of $250,000, and don’t hesitate to ask your bank questions about their liquidity position. At the same time, remember that banks are currently offering higher interest rates on deposits, so there may be opportunities for your cash to earn more.
Want to learn more?
If a business needs cash in this current climate, the reality is that their bank may not be able to help. Receivables financing may be an option. Tischer and Eichstaedt provided more information about how this kind of financing works in the recorded presentation.