When managed correctly, employment agencies can grow rapidly and be very profitable. For the right individual(s) they represent great opportunities. However, employment agencies have a lot of moving parts. Therefore needs owners/managers who are experts in many areas.
How does an employment agency make money?
Employment agencies recruit employees for companies that are in need of staff. Their profit comes from paying the employees less than what they charge their clients in total. The margins vary, but it ranges from 20% to 75%, depending on a lot of variables like location, industry, urgency, high skilled, and even supply and demand all have effects on the range.
Many companies like to work with employment agencies as they provide employees on an “as-needed” basis. Companies can ramp up resources when needed, As the leased employees require minimal overhead and can be dismissed anytime not needed.
Employees also like temporary employment agencies because they provide new opportunities, possible job experimentation, a flexible work environment and can also serve as a stepping stone to a more permanent position.
Start and growing Your Employment Agency
In this article, we discuss the basic steps required to start and grow a successful employment agency. Meticulously following these steps described below will ensure you have the adequate knowledge needed to start and steer your agency in the right direction.
Evaluate your skill set
There are four must’ve skills needed to be a success in the industry of employment. You must know how to:
- Firstly find employees
- Get clients
- Match employees and clients.
Manage personnel/employees
None of these skills are more important than the other, you must possess all four as they’re fundamental to the success of your agency. If you don’t have one, your company will fail. So the first thing to do is examine your skillset and determine if there are any disparities. Fill any disparity by hiring or partnering with the appropriate people.
SEE ALSO: What is Employment Verification?
Choose the right industry
One other major component of running a successful agency is choosing the right industry. You achieve this by firstly examining the market needs and then fulfilling them with your company. Also, ensure you understand the supply/demand cycles of your chosen industry.
Generally, the staffing industry is divided into three segments:
- Industrial
- Office or Clerical
- Professional or Technical
I must remind you that just focusing only on an industry segment is not good enough. You’ve to develop a very specific niche within your chosen industry segment. It’s always advisable to start within a small sub-niche and grow from there.
Determine the startup costs
Startup costs can be segmented into two which are established and operational costs. Establishment costs are those costs needed to set up your basic business. Many of which are one-time costs and must be attended to even before you can take on your first client. They include:
- The legal setup expenses
- Procurement of computers
- Procurement and installation of necessary software (HR, accounting, payroll, testing, and training)
- Office space (if needed)
- An Insurance
While operational costs are those costs you pay in other to find employees, clients, and to deliver your first months of services. Generally, higher-skilled job assignments require higher startup costs because salaries are higher, testing needs are more complex, and you must present a polished image.
Understand an agency’s cash flow
A common mistake made by new agency managers is failing to understand cash flow. In the employment industry, you must by law pay your employees every week or two week. But your clients, on the other hand would pay you every 30 to 60 days. This delay can create varieties of problems if not properly managed.
With a simplified example,Let’s illustrate this problem. Assuming a startup agency has $3,500 in the bank and a contract to lease two employees. The agency pays a weekly wage of $1,100 to both employees, while the agency charges the client $1,700 a week for this service. However, as it is common in business, the client pays the invoice on a net -30 days, Let’s examine the cash flow.
| Week 0 | Week 1 | Week 2 | Week 3 | Week 4 | Week 5 | Week 6 | |
| Paid Salaries | $0 | $1,100 | $1,100 | $1100 | $1100 | $1100 | $1100 |
| Invoice to clients | $0 | $1,700 | $1700 | $1700 | $1700 | $1700 | $1700 |
| Paid by Clients | $0 | $0 | $0 | $0 | $0 | $1700 | $1700 |
| Available Cash | $3,500 | $2,400 | $1300 | $200 | $900 | $300 | $300 |
As you’d notice in the cash flow, things would start off quite well at the agency. The first three weeks would be inconsequential. The agency would pay the employees without hassles and invoice clients as it should normally be. The problems would then arise in week 4 when the company lacks enough funds to handle the payroll. Both missing payrolls or underpaying employees are bad options.
Client starts making payments at the 5th week. At that time they can finally finish of the employees payment for 4th week. Here’s the tricky part, by completing the payment for the 4th week, the agency will have to short pay employees again for the 5th week.
Although things finally stabilizes at the 6th week. This situation could easily spiral out of control if your agency grows quickly.
It’s not uncommon for sales to get ahead of cash flow. But if the situation is not arrested properly, it’d result in cash flow problems, tax liabilities, missed payroll, and failure.
Determine where to find your employees
Finding employees is very a strenuous and exhausting process. Before you contact any candidate, I’d like you to ask yourself, “Why would someone want to work with my company?” Why are your competitive advantages? Are you different or better than your competitors?
If you don’t have convincing answers to the above questions, don’t bother proceeding. Firstly fix the issue. Create an edge for yourself, Be different from other employment agencies.
You can always recruit employees through the use of job boards, LinkedIn, contacts, referrals, and so on. There is a catch, though.
Everyone does those things, it’s really nothing different. So unless you work a very specific niche, you will have a lot of competition. You’d need to be very creative and use recruitment means that are non-traditional. Note that specific tactics vary by industry.
Finding clients (marketing and sales strategy)
Just like finding employees, finding clients is also a rigorous process. The competition is tough and from a client’s point of view, your company is “just another employment agency.”
Why should clients work with you instead of your competitors? What makes you better? Different? It’s paramount to have great answers to these questions before you go ahead to look for clients.
The common ways employment agencies gets their clients include:
- Newspapers
- Internet
- Trade publications
- Networking
- Word of mouth
- Referrals
- Cold calling
Although all these ways are great ways of getting clients, everybody uses them. You will be hard to spot in a crowded and competitive market given that you’re a new company.
You’ve to develop creative new ways to get in front of potential clients in your chosen industry niche. But that is only half the work. You must also develop a competitive and valuable proposition they can work with. What can you give them that your competitors can’t?
Get a payroll service
Many companies who require the services of employment agencies have one time or the other gotten calls from their employment agency about needing funds to cover payroll. During the due diligence process, most companies often discover that the company has not done the payroll correctly. The most common problem usually is either improperly withheld or forwarded taxes.
If they’ve gotten to this point, believe me when I say it’s too late as the firm usually would have tax liens in place and is too deep in problems to be saved.
You can avoid all these and many more problems by working with a payroll service. This point is critical. It will save you a lot of headaches.
Get proper insurance
Employment agencies need a lot of insurance. We are not insurance experts. Consult an insurance agent that specializes in the industry. Here are some of the policies you may need:
- Commercial general liability (CGL) insurance
- Employee theft and crime coverage
- Employment practices liability insurance (EPLI)
- Professional liability insurance
- Workers’ compensation
- Property coverage
Handle the initial cash crunch
As discussed in step earlier in this article, understanding your company’s cash flow is critical to it’s success. Cash flow is mostly strained at the most critical times which is when you are starting or growing.
Get an adequate cash cushion or reserve before you start the business. If you cannot get a reliable cash cushion, consider using a payroll financing service.
Follow the above-listed steps if you wish to get into the employment industry, don’t forget to specialize in a niche and carve competitive advantages for yourself while at it. Good luck.
