Nick Florio, Partner, UHY
The last five years have left CFOs with no shortage of problems to solve and challenges to overcome. From the uncertainty of the Covid-19 pandemic, to trying to conquer rising inflation, to ever rising interest rates, CFOs across business sectors have grown accustomed to juggling multiple fire drills at once. Compounding these challenges for CFOs is the fact that as the world continues to try to emerge from this choppy economic period, not only are CFOs tasked with navigating immediate issues, but they are also simultaneously charged with revamping financial operations to better insulate businesses against similar disruptions in the future. And arguably nowhere is this creating more headaches than in the often-overlooked staffing sector.
Whether it is unpredictable cash flows or high-overhead costs, the staffing industry is a notoriously challenging business vertical for CFOs and accounting teams and presents a bevy of unique financial challenges. However, this doesn’t mean that finding success is impossible; it simply requires a comprehensive strategy whereby financial visibility, accountability and efficiency are prioritized.
With that in mind, below are some of the best practices CFOs need to keep in mind as they look to tackle the long-standing financial hurdles presented by the staffing industry.
Gap Assessment
Like many businesses, the financial health of staffing organizations is tied to the performance of a variety of factors across their business including things such as lead and sales generation, technology capabilities and the general effectiveness of their internal workflows. Moreover, because of how interconnected these components are, without the proper understanding of how each constituent part feeds into another, “fixing” one area may have unintended consequences elsewhere. Therefore, instead of diving in and making adjustments based on surface level observations, CFOs need to take a step back and have a clear understanding of exactly what a staffing organization is trying to achieve from a financial perspective, what their current shortcomings are and how each component is either helping or hindering the organization’s ability to achieve these stated goals. This begins with establishing a baseline level of performance and comparing this target to their actual financial goals. With this foundational understanding in place, staffing CFOs can then begin building the strategic roadmap, key metrics and progress benchmarks that will allow their staffing businesses to build toward the desired financial outcomes.
Establishing Metrics
With these learnings in tow, CFOs can then establish the framework by which a firm will be able to achieve financial stability and catalyze growth. This is of course easier said than done. CFOs need to find ways to manage and measure a myriad of accounting and financial tasks including expense management, recognizing revenue across various income streams, and ensuring proper financial reporting controls and measures are in place to meet compliance and regulatory needs. To successfully do this, CFOs need to break these metrics into two camps: those aimed at the balance sheet – such as cash flow, tangible equity and days sales outstanding (DSO) – and those for P&L – including EBITDA, leverage and interest ratios. Establishing clear metrics allows businesses not only to have a granular understanding of their growth trajectory but will keep businesses accountable along this journey and allow them to make better decisions when unforeseen circumstances arise.
Setting Benchmarks
Having guideposts for how a business is performing is essential for modern staffing companies. However, selecting the right benchmarks is a very delicate balance. The staffing industry is an incredibly competitive industry that is further broken down into a myriad of specialized sectors, so keeping abreast of how others in the space are performing is paramount. That said, simply benchmarking against others regardless of their business maturity or focal areas is a big mistake and can result in businesses making decisions that run counter to what is in its best interest for growth over the short-, medium-, and long-term. Getting benchmarking in the staffing industry right requires that CFOs take a holistic view of performance indicators including such industry published stats, Bureau of Labor Statistics data and other critical sources of information. Key indicators that should be kept in mind include:
- DSO – managing days sales outstanding is critical to making cash flow decisions. Industry standards vary between 45 and 50 days, depending on your specific sector – with some industries like healthcare being as high as 75-90 days.
- EBITDA – tracking your EBITDA is another measurement of cash flow that can also be benchmarked to your industry specific sector.
- Debt Service Coverage Ratio (DSCR) – employing your own DSCR will enable you to monitor how much of your cash flow is being absorbed by your debt. A good threshold here is achieving a DSCR of 1.2 to 1.
- Monitoring of your working capital is also critical as this will tie neatly into other cash flow and debt indicators and provide visibility on upcoming needs.
Closing thoughts
As the staffing industry emerges from the particularly tricky markets of the last several years, finding stability will be a foremost priority. By keeping these best practices in mind, CFOs will be able to help their companies find their footing, build resilience and capitalize on future opportunities.
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Tags: Accounting
