Summer of 2010 – Putting It In Perspective

Human nature tends to dictate us remembering the good times of the past while glossing over the difficulties of that same period.   We can remember the fun of attending an amusement park while conveniently forgetting our parents yelling at us that it was time to go.  For those that have been in the staffing industry for a while, we will tend to thrive on the “hey-days” of the late 1990’s and drown in the misery of today.  But were things as good as we remember and as bad as we think they are now? 

Acceptance

“Let’s party like its 1999….” The bottom line is more companies are using temporary help today than they did in the 90’s.  Working as a temporary employee no longer carries the negative stigma it did in the past either.  Thus the temporary help services industry continues to be the largest contributor of new private jobs in the current economy.

Compared to June one year ago, temporary help industry employment is up by 342,000 jobs, with 100,000 more jobs than the second largest gaining industry, health care (up 214,000). Meanwhile, the overall U.S. economy has lost 275,000 private nonfarm jobs compared to June of last year.

Temporary tends to lead the way when the economy recovers.  Most staffing firms experience (and profit) from recoveries before the general public realizes the economy has recovered.  The chart below demonstrates that temporary help rebounds months before overall employment, thus can be used as a leading indicator of what employment will do in the coming months.

More importantly temporary help represents a greater percentage of total employment.  Temporary help accounted for 1.93% of total employment in 1999.  Today it accounts for 2.13% of total employment.  This number does not include the explosive growth in the PEO business.  Moreover, industries such as renewable energy are presenting major staffing opportunities today but only small opportunities in the past.

Today vs. Yesterday

“All my troubles were so far away…” This really isn’t true when comparing statistics from July of 2009 to July of 2010.  Staffing employment in July is 25% higher than in the same month last year, according to the ASA Staffing Index.  Damian clients, which are independent providers of staffing, have experienced similar or better growth.

Lower Cost, Efficient Alternatives Have Become the Norm

Staffing companies today have the ability to brand themselves and cost effectively operate their business in ways that were not fully developed or even around in the late 1990’s.  Technology has changed the way we interact with our applicants and customers.

Recruitment

While company websites and job boards existed then, they were expensive and not very advanced.  Many applicants still used print media when seeking employment and staffing companies still had to pay big dollars to list job openings there.

Today, technology has allowed staffing firms to cost effectively use their own websites as an integral recruiting tool.   Many employment seekers can actually apply and submit their resumes on-line.  That information then populates the applicant fields so your recruiters don’t waste valuable time and money on data entry.

Marketing

Don’t get me wrong, traditional methods of branding are still effective like print, radio, direct mail etc.  But on limited advertizing budgets, staffing companies need to get the most value from their dollars.  Email marketing is cheap and effective, especially when something of value is offered.  In other words, try and avoid using email the same way print advertisement is used.  Offer articles of interest or special offers to readers of your email campaigns. 

Social media is maturing very nicely.  Research the number of recruiters and staffing companies on Linkedin, Facebook or Twitter.  The numbers will astound you.  And there is a reason they are all there – it works!  

Get reviewed.  There are sites such as yelp.com that allow customers to review local businesses.  Have your satisfied customers, whether employees or end-users say positive things about your company.

Electronic media also includes your company marketing materials.  Potential customers tend not to keep as many hard copy marketing materials as in the past so why spend as much money on these items.  Plus, nothing impresses a potential customer more than receiving additional information (via email attachment or web link) about your services within minutes of ending a phone conversation. 

Funding Companies

Yes this extremely important capital source has improved and is less costly in today’s marketplace.  Funding companies are at least 25% cheaper than they were in the late 90’s.  Some of them offer a complete backroom solution that may bring fixed costs down ever further.

The current tightening of the credit markets could have been the death of the staffing industry if funding companies didn’t exist.  Yet while other industries struggle raising money to grow their business, staffing companies have many funding options available. 

Keep the Faith

“The good times weren’t always good and tomorrow ain’t as bad as it seems…”  In today’s uncertain economic climate, it can be hard to see improvements in the market place.  It is important to take a “trip down memory lane” to see how far we’ve come and what opportunities lay ahead as an industry.  The staffing industry has improved in many ways that should allow your company to prosper.

Everything is for sale at the right price and every business owner wants to know the answer to the above question. What determines the “worth” of the business? Most businesses are evaluated by some multiple of earnings, which plays a key role in the total acquisition price. But what factors determine the multiple?

EBITA x multiple = SALE PRICE

There are two driving forces that affect the value of a staffing business. They are internal and external. Some of the external factors that exist are:

• Overall industry growth potential

• Local economy

• Local Political Climate

• Segment of Staffing Market Served

• Amount of Interest by outside investors or larger staffing companies lookingto increase market share

These are factors that individual owners have little control over.

Internal factors are those that an owner can control. They involve the overall financial strength of the company. These include:

• Financial position of your customers and the average turn of your accounts receivable

• Diversification of your accounts receivable portfolio

• Length of contract or exclusivity agreements with your clients

• Percentage of temporary placements to overall business

• Earnings Before Interest, Taxes and Amortization (EBITA)

EBITA is one of the most important internal factors that affect the sale price. This number really affects both sides of the equation. The greater EBITA is then the more your company is worth.

MAXIMIZE YOUR COMPANY’S WORTH BY USING DAMIAN SERVICES

Sales and Income. These are the most important items in the equation that determines the “worth” of your business. The higher the sales, the more market share your company owns. The higher percentage of sales due to temporary help placements, the more valuable your company will be. Lastly, the higher the sales the more dollars will flow to EBITA.

Using Damian Services will maximize the net worth of your business… period. Damian supplies unlimited payroll funding that will allow you to increase the net earnings side of the equation with temporary help placements.

EBITA x multiple = SALE PRICE

Damian also provides a complete back office outsource solution that allows you the time to concentrate on the left side of the equation (multiple). This will help your company accomplish two things. First, choose what segment of the market to develop and second determine which market(s) to expand.

EBITA x multiple = SALE PRICE

Self Funded or Limited Funding Using Damian’s Unlimited Funding

Current Billings = $1,000,000                                          Potential Billing $3,000,000

Current EBITA = $100,000                                                Potential EBITA = $290,000

Current Value of the company                                          Potential Value of the company
$100,000 x 4 = $400,000                                                 $290,000 x 4 = $1,160,000

In this example, the “worth” of the business increased by 290%

By outsourcing your back office you are swapping a fixed expense for a variable one, your company will save thousands of dollars on personnel and general administrative expenses.

Most of the time, the purchaser may increase EBITA by the amount of the variable expenditure. For example, by outsourcing your back office, perspective buyers do not have to add duplicate personnel or offer severance packages to those employees that have to be reassigned. They simply add the outsourcing fee to EBITA which increases the net worth of the business.

For more information call 800.232.6426.

Our clients are receiving notices of hefty tax increases as this article is being written. Make no mistake, increases in the SUI tax rate is a potential jobs killer, since that tax is paid by employers only. Given that the staffing industry’s sole purpose is to give all employers an opportunity to economically add staff, the impact of the SUI tax increase is disproportionately borne by these companies.

Explaining Unemployment Benefits
Unemployment Insurance is a tax paid by every company in the United States that employs people. The more people that are employed, the larger the fund gets. In times of high employment, the unemployment insurance fund has more than enough money to pay its beneficiaries.

It is from this pool of money that employees receive monetary unemployment benefits. Each company pays this tax in the state where the employee works. The tax is calculated as a percentage of payrolls that is determined by each state. It is adjusted each year based on the number of claims that are paid to employees that are no longer employed by your company.

In our current era of high unemployment, it may be difficult to place employees that are ending their current job assignments into new ones. In other words, there may not be enough open orders to offer jobs to the temps. When this happens, the unemployment fund (your tax money) that the state uses to pay benefits dwindles.

Potential Jobs Killer
The impact of this tax on all employers in the United States should not be understated. Large employers, like staffing companies are in for a big surprise. For example, if employers had a $5mm dollar payroll that was subject to a 3% SUI tax in 2009, the SUI burden was $150,000.

$5,000,000 * 3% = $150,000.

In 2010, that same employer with the same $5mm dollar payroll is hit with 50% increase (4.5%) in the SUI tax (we have seen some that have doubled), then the employer will pay $225,000 in 2010.

$5,000,000 * 4.5% = $225,000 – a whopping $75,000 increase.

When employers are faced with this kind of tax increase – one based on payroll – how is that supposed to stimulate job growth?

Opportunity for Staffing Companies
The staffing business is a people business where contract employees typically work alongside your customers’ permanent employees. Your customer knows the SUI tax is going up – since their rate is also increasing. Since this tax increase is affecting them, your customer should now be in the right mindset to expect and accept a price increase. Sure, they may give you a little static but your customer knows firsthand that your cost of providing employees has gone up.

Good selling and negotiating skills are still needed in order to get a higher price and staffing companies need to use this as a selling tool! You may be able to convince your customers to use more temporaries and increase your margins in the process.

Benefit to your Customers
Some end users of contract labor already understand the benefits of using a staffing company. Staffing is one of the only industries to add jobs in the last six months. We are seeing increases in contract usage across the board and in particular manufacturing and IT placements.

Companies are looking for flexibility in hiring. According to a recent article in the New York Times as demand rose after the last two recessions in the early 1990s and in 2001, employers moved more quickly to temporary help. They added temps for only two or three months before stepping up the hiring of permanent workers. Now temp hiring has risen for six months, the economy is starting to grow, and still corporate managers have been reluctant to shift to hiring permanent workers, relying instead on temps and other casual labor easily shed if demand slows again.

“When a job comes open now, our members fill it with a temp, or they extend a part-timer’s hours, or they bring in a freelancer — and then they wait to see what will happen next,” said William J. Dennis Jr., director of research for the National Federation of Independent Business.

One Overlooked Fact
News Flash to Your Customers: Because end users of your services had the flexibility to use and “layoff” contract workers instead of their own employees last year, they are realizing “lower” SUI rates for 2010. When contract employees file for unemployment, those claims go against your company not your customer. Less claims equal lower unemployment rates – thus they pay less tax on their permanent staff and potentially save tens of thousands of dollars per year. This is a very tangible reason to use contract labor. The economy is only marginally better than last year, so it would behoove your customers to stay with this winning strategy.

Increase Your Price
Let’s assume Jane Doe earns $10.00 per hour. Your bill rate for Ms. Doe is $14.50 or a mark-up of 1.45%. The 2009 payroll tax burden is $1.15. In this example the SUI tax is 3%.

$14.50 Bill Rate
$10.00 Pay Rate
$1.15 2009 Payroll Tax Burden (3% SUI)
$3.35 Gross Profit

If SUI increases by 50% then adjust the bill rate by the dollar amount equivalent to keep your margin steady.

$14.65 BILL RATE (slight increase)
10.00 PAY RATE
-.1.30 2010 PAYROLL TAX BURDEN (reflects a 50% increase in SUI tax)
$ 3.35 GROSS PROFIT

Between You and I
Most states “cap” the SUI tax burden on the first $8,000 to $12,000 in wages per employee. In other words once your employee(s) earn the cap amount, then the employer stops paying the tax. However, your $.15 an hour increase in the bill rate stays in place.

Continuing with the above example let’s assume your average employee works 1500 hours and the SUI cap is $10,000. Once your employee works 1,000 hours ($10,000 in wages), your company stops paying the SUI tax. Thus, your company realizes $.15 MORE in profit on the last 500 worked for the year.

500 * .15 = $75.00 additional profit per employee

Multiply that by the number of employees that reach the limit and you could be enjoying a much needed vacation or a nice down payment on a new car next year. Now that can really help stimulate the economy.

Scott Locaccio, president of Encompass Personnel in Virginia Beach, VA contributed to this article.

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Access to capital is the single most important item to a staffing company that place assignment employees. Most staffing companies need at least six weeks worth of accounts receivable financing just to pay its assignment employees and direct payroll costs. They also need 2 – 3 months worth of working capital to pay office salaries and fixed expenses. Since most entrepreneurs want to grow their businesses, the will need even more capital to fill additional open orders.

Figuring out where to get the cash to fill open orders is a good problem to have. Figuring out where to cash to pay for stagnant payrolls and expenses isn’t so good. Either way - finding the right solution to the cash-flow problem takes some common sense and an open mind.

In this economy, plenty of staffing companies – as well as other businesses - are being forced to choose who gets paid when there isn’t enough cash to meet all obligations. Obviously, you must pay your assignment workers because they are the ones that will generate profits. And you definitely want to use available cash for additional profit-generating employees. So who will get the short the stick?

When short on cash, can you make your lenders wait for the next payment? How about your suppliers? These are tough choices, but if you’re the one calling the shots, there’s one item you definitely want to put at the top of the list to be paid: payroll taxes.

Uncle Sam is the Owner

Employers are required to withhold income tax and social security tax from paychecks and pay that money over to the IRS. The employer is considered to hold that money in trust for the government. This rule doesn’t apply to other payments, such as income tax. Payroll taxes are special, because they’re required to be withheld. As a result, this tax debt is in a different category from others. The employer may owe money to many other creditors, but it doesn’t hold money in trust for them. When it comes to payroll taxes, the government is considered the owner of the money even before it has been paid over. If you don’t pay it over, you’re doing a bad thing, and you can expect something bad to happen.

Granda Hills Community Hospital Case

That’s what happened to James Doulgeris in a recent case. He was appointed interim president and CEO of a hospital that was in bankruptcy. According to a district court opinion, the hospital was already delinquent in its payroll taxes when he took over. Yet he had authority to sign checks, and in fact signed checks totaling millions of dollars to other payees while the payroll taxes remained unpaid. Despite his argument that the CFO was the person in charge of deciding whom to pay, the court found that Doulgeris was a “responsible person” and entered judgment against him in the amount of nearly $2 million.

It may be tempting to suppose that a different rule would apply if the business never had the cash to pay the taxes in the first place. For example, a business might have a $100,000 payroll obligation that includes $15,000 of withholding. If it has only $85,000 on hand, it might pay $85,000 to the employees and plan to come up with the $15,000 required for the payroll tax later. The pay stubs will indicate it withheld $15,000, but in reality that additional money never existed. If the additional $15,000 never appears, the responsible person penalty can apply even though the business never had the money. The reason: if it had only $85,000 on hand, it was not in a position to pay that amount to employees, because any amount paid to employees has to be matched with the appropriate amount of withholding.

Trust Fund Recovery Penalty

The IRS can hit you with this penalty even if you aren’t an owner or someone who otherwise might benefit financially from the failure to pay these taxes. If you could have caused the employer to pay the taxes and you failed to do so, you can end up on the hook for the entire amount.

How can the government collect the tax from you, when you weren’t the person who owed it in the first place? The answer: they don’t collect the tax from you. They collect a penalty, and the penalty happens to be equal to the amount of the tax that wasn’t paid by the employer. It’s a harsh result, but that’s the law as written by Congress. The lesson: when your business is in trouble, make sure the payroll tax is paid, even if other creditors are screaming for their money.

Solution: An Outside Payroll Processor and Funder

An outside payroll processor like an ADP or Paychex will take away the temptation of diverting money due the IRS to other expenses. Payroll processing companies accrue for all payroll taxes the week they are incurred. While these type of companies “keep things straight” with the IRS and other government taxing agencies, they will not help grow your business.

For a complete solution, turn to a full service payroll funding company. They will not only process payroll and deposit tax money, they will fully finance payroll growth due to an increase in business. Increased business equals larger profits for your company without having to rely on Peter’s money.

Simply put: a payroll funder will supply an infusion of cash that gives a staffing company the ability to pay Paul while staying on Peter’s good side! And when Peter is the IRS that is the only side you want to be on.

The following paragraphs discuss techniques that can help keep your company focused on the staffing business, as opposed to becoming a banker.

Due Diligence

Start with a 10,000 ft. view. What niche industries are you marketing and what types of jobs created in those industries? What are the long term prospects for growth? Are these companies, the products they produce or the services they offer becoming obsolete? Is the industry off-shoring its workforce? If the answer to these questions are generally positive, then start your due diligence process on the individual prospects.

Onsite Visits

This is one of the very first things you should do as a creditor.

Draw on you experience as a shopper. Have you ever walked into a retail store and seen empty shelves, disorganized merchandise and few employees? What was your impression of that business? How long did it take for that business to close?

A business needs to at the very least appear vibrant in order for it to succeed and more importantly pay its labor invoices. An on-site visit to a warehouse, factory, medical facility or office can often times give you clues as to how well the business is run and how finically viable it may be.

Once the onsite visit is complete, start gathering financial information. Use credit services like Dunn & Bradstreet (commonly referred to as D&B). If those reports are incomplete, bank references and audited company financials are essential.

Discover which other agencies they have used in the past and contact them about payment cycles. The trick here is to NOT contact ones that they are currently using. If the current staffing provider(s) is having collection problems, they may not be upfront in hopes that another staffing company will take over the account and they can collect past due invoices. A staffing firm that no longer services the account will be far more upfront about the payment cycle.

Agree to terms and follow-up

Once you have agreed to terms, have the customer sign an acknowledgement form or contract. Having the terms written on the back of the time sheet is not enough. It is easier to get the customer to comply with terms when you have them in writing and both parties have signed the agreement.

Follow-up - just like you do in the sales process. Create a credit-cycle. Simple things like scheduling calls to receive a status update of payment and continuing on-site visits will help keep your company visible and the payments timely.

Stay in control of the payment cycle by referring to the signed agreement. Remind the client that you delivered the required personnel and they need to deliver payment. Enforce provisions within the agreement. For example: if the terms call for late charges on past due invoicing, charge it.

Keep the client engaged. Make them part of the solution. Open lines of communication are key to getting paid. For example, offer the client payment options – electronic transfer of funds, credit card payments, etc. Even if it costs your company a little money it is better than having the invoice unpaid. Once communication breaks down, the collection process becomes much more difficult.

If payments continue to be past due, consider reducing the amount of staff or billable hours to that customer until payments become current. A successful way of achieving this is have the client pay the current invoice and part of past due invoicing each week until the credit terms are in compliance. If all else fails, pull your staff from that account. That is a tough action, but you need to limit your credit exposure. Usually customers that pay very slow have some kind of financial problem.

Build Credit Support

Most small to medium sized staffing firms do not have the capital or time to spend on a credit department. Dedicated internal employee’s and D & B’s are pricey. Complying with invoicing requirements, sending invoices consistently on time, remittance processing, reporting, follow up calls and visits and generating late fee invoices are time consuming.

Staffing companies may want to look at alternative financing sources that provide this valuable service. Those companies should have an infrastructure built to support the credit evaluation, invoicing and collection process. Besides, having a professional third party involved in the collection process gives an independent staffing company more leverage in collecting past due labor invoices.

THE PAY OFF

Once your new credit procedures are in place, you will not only save money by reducing annual write-offs and collection costs, but also save on financing costs as well. The quicker invoicing is paid, the less money you have to borrow resulting in lower costs.

For example, if average DSO was reduced by 2 weeks, then your company could save about $20,000.

Average DSO is 8 weeks

Example: $100,000 Weekly Sales
* 8 DSO Turn (in weeks)
$800,000 Dollars needed to finance A/R

10% Financing Charge

$80,000 Annual Finance Cost

If average DSO is reduced to 6 weeks:

$100,000 Weekly Sales
* 6 DSO Turn (in weeks)

$600,000 Dollars needed to Finance A/R

10% Financing Charge

$60,000 Annual Financing Cost

Result - $20,000 in cost savings

By staying out of the banking business, your company could save thousands of dollars in write-offs and financial charges each year. By having a credit and collection process and infrastructure in place will allow your company to dedicate more time to selling, recruiting and developing relationships – all items that will grow your business.

It is no secret that the nation’s employers have been shedding jobs for nearly a year. These unfortunate people then apply and collect unemployment benefits while they search for another job. Unemployment benefits serve a real purpose in helping stabilize people’s lives while they are temporarily out of work. However owners and managers, especially of staffing companies, need to remember who pays for these benefits.

Unemployment Insurance is a tax paid by every company in the United States that has employees. The more people are that are employed, the larger the fund gets. In times of high employment, the unemployment insurance fund has more than enough money to pay its beneficiaries.

It is from this pool of money that employees receive monetary unemployment benefits. Each company pays this tax in the state where the employee works. The tax is calculated as a percentage of payroll that is determined by each state. It is adjusted each year based on the number of claims that are paid to employees that are no longer employed by your company.

In our current era of increased layoffs, it may be difficult to place employees that are ending their current job assignments into new ones. In other words there may not be enough open orders to offer jobs to the temps. Further exacerbating the problem, the federal government may extend unemployment benefits for a longer period of time if the current recession lingers.

This is understandable if there are few available jobs and an individual cannot find one. But as state unemployment funds deplete nationwide and more money is needed to pay the current beneficiaries, how will the government fund it? Most likely, by increasing the % tax that each business owner in America pays.

It is very important that employees receiving unemployment payments truly are deserving of those benefits. The more claims that are paid against your company, the higher the tax rate will be the following year.

A good example of this involved one of our current staffing clients. They landed a large account with a major bank. They placed in excess of 150 employees a day in the bank’s processing center. This is an established staffing company that did not add a lot of fixed costs and luckily continued to grow their customer base. As the banking crises in the U.S. spread, this large bank laid-off all of its temporary personnel. Since our client could not place all of these employees in other positions, the laid-off employees applied for unemployment benefits which they were entitled to receive.

The next year our client’s unemployment rate more than doubled for all its remaining employees due to this one big layoff. This is an example of increased variable costs resulting from the loss of a major account.

Employees that wrongly apply for claims can be successfully denied unemployment benefits by following a few simple rules with a basic concept – Document, Document Document

1. Make sure to offer an employee finishing an assignment another assignment that he or she is qualified to do.
2. Document each employee’s work performance and assignments offered via phone, email etc.
3. If an employee quits - document the reason. If the reason is unknown then describe the circumstances which led you to conclude the employee quit.
4. If you receive a claim from the state, respond as timely and provide as much documentation as possible.

The last thing most of us want to do is see an ex-employee struggle financially. However, you as a business owner or manager need to do what’s best for your business. In this case – control next years unemployment costs.

There are very legitimate reasons for disputing an unemployment claim. Listed below are the most frequently used explanations to disqualify an unemployment claim:

 Discharge for misconduct in connection with work

 Voluntary quit due to health reasons

 Voluntary quit due to working conditions

 Discharged for dishonest or criminal act

 Failure to perform work assignment

 Excessive tardiness or absenteeism

 Discharged for drug related offenses

Not all state laws are the same. You should also review the laws regarding unemployment claims in the state(s) where your employees work.

Automate the process.

Again, the simplest but most important thing your staff can do to reduce the amount of unsubstantiated unemployment claims is to document the work history and performance of each employee. By utilizing software and a payroll service, your staff will be able to easily create and access detailed records on each employee. Staffing software also allows you to track open job orders, thus allowing your company to quickly and efficiently place an employee coming off assignment onto another job.

Sure it’s possible. And the answer has less to do with politicians and more to with the free market place and small businesses like independent staffing companies.

Stimulus

We hear a lot of talk about what the politicians would like to do with stimulating the economy. This is fine but a $500 rebate check only goes so far and does not have any long-term growth benefits associated with it.

Now that the economy has slowed, the free market has begun to stimulate the economy. Some stimulants are easier to see than others. An obvious one is the price of gasoline. Check out the price of gas the next time you fill up. It has fallen about 40% from its high and poised to fall further over the next few months. If the decline in price holds, this should positively impact on our economy over the next year.

For example, if the price of gasoline is $2 cheaper than it was and the casual driver uses 10 gallons of gas per week, the savings is a recurring $20 per week or $1,040 a year. The savings increase dramatically for all businesses from staffing companies that drive to visit their customers regularly to trucking companies, airlines etc. This savings amounts to more money available for individuals and businesses to spend, invest and create jobs that grow the economy.

Furthermore, a reduction in the price of a gallon of gas can create an added correction in price on other household items. For instance, the price of corn was up sharply over the past year. A big reason for the rise is that corn is used to produce ethanol instead of being used in processed food. Corn is a key ingredient in many food products. Additionally, many farmers planted corn instead of other crops which caused an increase in those prices as well. Based on current data the price of food should start to come down over the next year which will again leave individuals and businesses with more money.

The free market is also correcting the housing crisis. The falling price of housing is painful in the short-run. However, that has to happen in order to cure the current imbalance of supply and demand. Falling prices are causing builders to build less housing (reduce supply) and will eventually stimulate the consumer to buy (increase demand). Evidence of this may be beginning to transpire. The number of available units has gone down over the past couple of months. Hopefully, this is the start of a trend that will stabilize the housing market.

A prolonged period of falling prices is not good for the economy either. The above mentioned scenarios are really pricing corrections, due to the fact that price of oil, food and housing were rose very quickly causing them to be over-inflated.

Credit Market

This is probably the most difficult area to address. Basically, the banking industry has suffered big losses over the past couple of years due to the housing crisis. This has caused the banks to become very skeptical about lending money which is spilling over to other types of lending as well.

Those of you that use bank financing to run your staffing company may have experienced this firsthand. Numerous banks have stopped lending to staffing companies, reduced lines of credit and/or put very restrictive rules in place. The credit problem gets bigger if their customers slowed payment on labor invoices because they are experiencing the same financing problems. Less credit is the last thing your business needs. Luckily, there are alternative financing sources that staffing company’s can turn to that understand the business and are not afraid to lend money.

In general, most banks have probably over reacted to the current problem in the short term. They have money to lend. Eventually, the free market will force them to start responsible lending again. They can only make money by lending it.

What’s Next

Again the economic numbers that have been recently reported are negative. However, these numbers mostly reflect what has happened in the past. Employment for example is a lagging indicator, not a precursor of what’s to come. Layoff’s typically happen after the economy slows. Most of you reading this article know how difficult it is to terminate positions.

Stay Positive

In spite of the bad news, placement opportunities still exist. The availability of qualified candidates has increased and certain industries such as medical and IT are still adding workers. And when the economy improves, and it will, temporary help employees are the first ones to go back to work.

A positive attitude comes from the top. Sales people, recruiters and office support staff mimic the leaders of the organization. If the leaders are negative about the business climate, then your front line people will use it as an excuse for missed business opportunities which can be disastrous for your business.

Buck-up! Over the past 27 years, we at Damian have seen many new start-ups, small and medium staffing companies prosper during difficult economic times if they have the right business savvy, financing and management tools, positive attitude and drive to succeed.

By: Nick Andriacchi

Author’s Note

There are many, many components to our economy. I chose three (oil, corn and housing) commodity items as examples of how the free market corrects itself that would be familiar with most readers.

Usually, it means one of two things. 1. If managed correctly, this can be a springboard to bigger and better things for your company or 2. It can signify trouble ahead for your company in different ways.

How can landing a profitable, large account with a seemingly credit worthy company be bad for business? Easy. The following case studies highlight 5 potential pitfalls:

 Sales Complacency

 Increased Fixed Cost

 Increased Variable Cost

 End-User Insolvency

 The Price Squeeze

Case Study #1 Sales Complacency, Increased Fixed Cost and the Price Squeeze

I first started working at Damian Services Corporation in the early-nineties. One of my first accounts as an account representative was a start-up company called Northeast Temporaries located in Pennsylvania. After about two months in business they landed an exclusive contract with Dial Corporation. This was a strong financially viable company. The contract called for good margins and our client had about 100 people working there every day for one year. They added internal infrastructure in order to service this account. What they did not do is grow their customer base – which we strongly advised our client to do.

When the contract came up for renewal, Dial Corporation demanded a significant drop in price. Our client could not profitably meet the new pricing terms and was faced with losing money on this account – even with the large volume of business. As a result, Dial Corporation chose a new vendor. Saddled with the loss of their main customer and now under utilized infrastructure, Northeast Temporaries quickly ceased to exist. This is a great example of Sales Complacency, Increased Fixed Cost and The Price Squeeze.

Case Study #2 Increased Variable Cost

This next scenario involves one of our current clients. They landed a large account with a major bank. They placed in excess of 150 employees a day in the bank’s processing center. This is an established staffing company that did not add a lot of fixed costs and did continue to grow their customer base. As the banking crises in the U.S. spread, this large bank laid-off all of its temporary personnel. Since our client could not place all of these employees in other positions, the laid-off employees applied for unemployment benefits which they were entitled to receive.

The next year our client’s unemployment rate more than doubled for all its remaining employees due to this one big layoff. This is an example of increased variable costs resulting from the loss of a major account.

Case Study #3 - End-User Insolvency

Have you ever had an order land in your lap that was seemed too good to be true? Consider this: A decent-sized homebuilder in central California needed approximately 25 construction laborers per day. They were willing to pay double the going rate in order to get them. We ran a Dunn & Bradstreet report which came back ok but really did not warrant the kind of credit that this customer required. Considering the D&B report, amount of potential receivable dollars involved and the inflated bill rate for the laborers, we advised our customer against filling the order.

They did so anyway. Two months later, the end-user declared bankruptcy and our client lost over $100,000 of their own money. If the client did not have other customers, they would have been out of business.

Luckily during our 27 years of exclusively serving independent staffing companies, situations like this occur very rarely with our customers. At Damian, we put our clients well being above making a quick dollar from unprofitable business. Many times, we have advised our clients not to have too much concentration with one customer and to avoid taking low-margin, high-risk business. The old saying “Don’t put all your eggs in one basket” very much applies to your businesses long term survival.