Simple question, right? But how do you best measure success in your staffing firm? Sales revenue? Gross profit dollars? Gross margin percent? Mark-up percentage? Net income?
You can measure dozens of metrics. There are sales metrics. Recruiting metrics. And lots of different financial metrics. There are backward-looking metrics that tell you how you are currently doing. And forward-looking performance indicators that can help you forecast how you will be doing.
You should track and measure these three metrics:
- Gross margin percentage and gross profit dollars
- Mark-up percentage
- Operating income
Let me explain each of these in more detail.
Gross margin percentage & gross profit dollars. Sales revenue provides a wonderful “feel good” metric, but it tells you little about the strength of your business. The reason is that sales revenues don’t account for all the differences in direct expenses. For example:
- Temporary wages and benefits may vary greatly from one staffing firm to another — or even from one job order to another within a staffing firm.
- Workers’ comp costs will vary based on a staffing firm’s business mix, location and experience modifier.
- State unemployment insurance costs will vary based on location and experience.
- Other direct experiences such as administrative fees to a VMS or per diem paid to contractors.
Focus on gross margin percentage and gross profit dollars each month – both with and without the impact of direct hire. Gross profit equals sales revenue minus the direct costs associated with those sales. These direct costs include temporary employee wages, workers’ comp, FICA, federal unemployment, state unemployment, health and other insurance costs as well as MSP/VMS fees. Gross margin is the percentage of gross profit divided by sales revenue.
Gross profit dollars essentially measure the revenue available to operate your staffing firm, and they can be measured at the level of a branch, service line or for your company as a whole.
When evaluating gross profit, look at industry benchmarks to see how well you are doing compared to other similar businesses as well as looking at monthly and quarterly trends to ensure your business is really trending in the right direction.
One last point about measuring gross profit and gross margin. Measure direct hire fees separately from temporary staffing gross margin. “Perm fees” skew gross margin calculations and result in another feel-good measure by looking higher than your core business, contract staffing, actually is. It is impossible to watch trends easily unless you separate both.
Mark-up percentage. When it comes to being profitable, no metric is more critical than mark-up percentage. This is the percent difference between your bill rate and pay rate. The higher the mark-up percentage, the more money you’ll have on your bottom line.
If you don’t aggressively manage mark-up, you run the risk of putting yourself out of business — even when sales increase!
Ideally, you want your mark-ups to be as high as possible, but as I am sure you are well aware, your clients are constantly trying to negotiate your mark-ups down. Train your sales reps to stay away from mark-up discussions during negotiations. It’s much better to negotiate bill rates and service levels.
In terms of running your firm, you want to ensure your mark-ups are in line (or slightly better than) industry averages. If they are too low, you won’t have enough cash to operate your firm.
Operating income. Operating income is the amount of income or loss you have after you subtract your operating expenses from your gross profit. Operating expenses are costs related to the day-to-day operations of your business. They include: internal employee salaries, marketing, recruitment advertising, rent, utilities, computer and office expenses, license fees, legal fees, insurance, property taxes, travel and vehicle expenses.
Operating income is critical for assessing the efficiency of your organization (i.e., how profitable are you relative to your sales and gross margin?), and it provides a measure of your ability to make growth investments (i.e., how much free cash flow you have available to invest in sales, marketing and expansion efforts).
New Year, New Outlook
Start 2021 off right by focusing on these three metrics now!