The staffing industry is made up of people from all walks of life. When we talk about maximizing gross margins to ensure profitability, it means diving into the deep end of some pretty challenging business concepts and decisions. So before we get into the weeds on ways to maximize margins, it’s important to set a baseline: what actually are margins?
In short, your margins are what you take in based on your bill rate, minus your expenses. For anyone who has been in the staffing industry for any amount of time, you know that these expenses can be vast and complicated.
There are the everyday expenses: rent, paying your staff, benefits, and everything else that goes into running a business. There is the crucial cost of paying your talent. And then there are other costs, which we’ll broadly refer to as burdens.
It’s crucial for both you and your team to understand the cost of doing business, because only when you have a full picture of an agency’s financial viability are you able to make informed decisions. Without knowing burden rates, sustainable bill rates, or risks associated with specific clients, industries, or territories, it can lead to business decisions that threaten profitability over time.
Getting to Know Your Burdens
Your burden rate includes all statutory expenses and employer payroll taxes that are legally required of a staffing firm. Some of these include unemployment insurance (FUTA and SUTA), Social Security, Medicare, and workers’ compensation insurance. These costs are unavoidable, and they’re highly variable based on the state you’re operating in, job type, and workforce size.
As an example, a warehouse associate working with heavy equipment will have a significantly different workers’ comp rate than an office-based admin role. Accurately assigning work comp codes and tracking your unemployment insurance taxes can prevent underpayment penalties and budget shortfalls.
Additionally, tax rates, particularly FUTA and SUTA, fluctuate annually and differ by state, which means your burden costs can shift—sometimes drastically—from year to year. Staffing technology can help track and forecast these changes to prevent surprises.
Calculating Markup and Gross Margins
Once you’ve tallied your burdens and general costs, the next step is setting your markup rate, which is the percentage you add to your pay rate (plus burdens) to determine your bill rate (we get that that’s a lot of rates, but bear with us). Staffing agency markup rates often range between 45 and 75%, depending on the role, region, and demand.
Let’s take a look at an example:
- Assume you have a placement with a $14/hour pay rate and a 12% burden rate. With burdens factored in, it will actually cost $15.68/hour in total cost.
- If you set your markup to 20%, that means your total margin will be $2.80, When you subtract your burden costs, $1.68, your margin will be $1.12 per hour, which is barely breaking even.
- With a 60% markup, your margin jumps up to $6.72/hour.
Now let’s extrapolate that to a 12-week contract for three employees working 40 hours a week:
- At a 60% markup you’re looking at a $9,676.80 gross profit
- A 20% markup will only see $1,612.80 in gross profit
That $8,000 difference could make or break your staffing firm depending on internal expenses.
For a more detailed breakdown of these variables and how to calculate margins, download our guide, Maximizing Margins in Challenging Economic Times.
How to Use a Gross Profit Calculator (GPC)
One important tool for staffing agencies is a gross profit calculator. These tools allow you to enter all of your individual burden rates, bill rates, and other costs and then provides your gross profits based on those parameters.
At Lone Oak Payroll (and our technology platform, TempWorks), we actually have an integrated GPC that enables our clients to adjust their rates and calculate profitability directly within the software. Our platform automatically enters state-specific burden rates so users can adjust different factors like bill rate or pay rate of an assignment or job order to get a better understanding of a customer’s potential profitability. We’ve taken those same formulas and made them available on site (for free!) so everyone can understand their margins better. Test out our gross profit calculator here.
The economics of the staffing industry are complex. But remember, you don’t have to do it alone. Bringing in tech partners, funding partners, or consultants to handle different aspects of your business can lead to major savings in the future.
For more information on ways to optimize your business to protect your agency’s profitability, download our guide, Maximizing Margins in Challenging Economic Times.