Out-sourcing Company Case Study - always be remarkable.
Staffing & Out Sourcing : Real World Case Study
Situation: A five-year old staffing & out sourcing company has five accounts and 10 employees working for each client.
The company has a 30% market-up on the hourly rate paid to their employees. On average, their clients pay invoices at 30 days of age. The contracting firm company must pay their employees every Friday and has a $50,000 bank line but is unable to grow because they do not have enough free cash to add additional employees. The company is reluctant to Factor their receivables because they are afraid it will diminish all their profits, which are only 3.6% of revenue.
Solution: The company adds three new accounts and 50 employees, then each Friday, the out-sourcing company factors their invoices at an 80% advance rate which they use to pay their employees and other expenses. Twice a month, the factoring company sends the staffing company the remaining 20% of their invoices (for those that have been paid), less factoring fees. The company’s Cost of Goods Sold (COGS) increases by approximately $214,000 due to factoring fees. The fixed expenses increase by 25% to handle all of the administrative costs associated with the additional employees.
Result: Due to the large increase in revenue, the fixed cost as a percentage of revenue drops almost 10%, while Net Income increases by 7.6%.
Bottom Line – Profits increased by $1,100,000 and the staffing company’s is growing and flourishing!