Have you ever heard someone say, “My business was growing so fast that I went bankrupt”? It sounds unbelievable. How can a business with a fantastic order entry and profitable services fail? Today I want to explain why this is a very real obstacle to your agencies success and what you can do about it.
When I started with my staffing agency, I thought there would be only two big problems. Learn how to hire good Temps and get contracts with many facilities to fill their open positions with our Temps. It turned out there was a third problem to take care of:
- Pay the Temps on time
What becomes obvious shortly after providing your first Temps is that there is a gap between the point in time when you pay your staff and the point in time when you receive a payment on the related invoice. For example, if you decide to pay your Temps every other week and your client needs six weeks to pay your invoice, then you will pay your Temps three times before you make your first Dollar. If you have one Temp who makes $35 per hour and works 20 hours every week for a hospital that pays you $45 per hour then your balance sheet will look like this:
Starting from week number seven your balance will remain stable because you now receive payments from your client every week. In total you have to put $4,200 into your bank account in order to support your business.
The example shows the basic principal of cash flow in your business. The faster you grow, the more money you will need in the bank in order to be able to pay your workers.
This may look like a huge obstacle to the fast success of your business. Luckily, you are not the only one who ever had this problem and many agencies that started with little cash were able to grow very fast because they used two key methods to manage their funds. One is payroll funding or ‘Factoring’ and the other one is to grow using your own profits. In this article I want to focus on this latter method.
Fund your growth from profits
This method works well when you started your staffing business on the side and still rely on a main income source to pay your living. In this situation you can decide to leave all profits in the business to pay for your growth until your revenues have reached a size where you can slow down growth and start paying yourself. Let’s add more time to our example and see how this works:
After some time the profits from the first Temp were used to pay off the entire debt and a second Temp is hired under the same conditions as the first Temp. Again, debt is built and then being paid off. The big difference this time is that the debt is reduced twice as fast as before since now you have two Temps generating profit for you. When this example is continued you will find that it takes less and less time for a new Temp to break even because there is more and more money coming in from your clients. If your aspiration is to grow the staffing agency to a size that it can sustain yourself and then quit your main job then you can do something like this:
You can modify the calculation in several ways to make it match your specific situation. For example, if you want to pay yourself right from the beginning you can add this expense as a new column to the calculation table and then reduce the pace of your growth. This is necessary because now you divert funds from hiring new Temps to paying yourself. Another way to modify the model is by adjusting the start-up capital you have. Maybe your friends or family decide to invest into your business after some time when they see that you started well. This will certainly boost your capacity to hire more staff.
Now you have a basic model to determine how fast you can grow your agency using only minimum seed capital.