Did you know that nine out of 10 startups fail? Though starting a staffing agency can be a worthwhile venture, it does certainly come with risks. Being an entrepreneur is tough, and if you’ve given up a steady salary to start your own recruitment company, you want to take every step you can to ensure you succeed.
Learning why so many other startup staffing firms have failed can help you avoid the same fate. As such, here’s five major reasons the majority of these startups tend to not make it past the first year.
1. No Market Demand
When it comes to starting a business of any type, you need to ensure there’s demand for your services. If employers don’t require the services you offer, you won’t be able to generate any revenue. Choose your market carefully and determine how much direct competition there is in your area. The market you wanted to dive into might not be the right market to attempt to penetrate.
While you might feel like you’re going to burn out soon, the good news is you don’t have to do it all on your own. Even if you’re a one-person team, you can get the help you need by outsourcing non-revenue-generating tasks, including HR, payroll, bookkeeping, and compliance. Once you send these tasks out of house, you’ll have the time you need to get back to the work you love: servicing clients and customers.
2. Pricing Themselves out of Business
Many factors will need to be considered when you determine your pricing structure, including what your competitors are charging, the demand for the candidates you place, your location, the candidate’s skill level, and even the relationship you have with clients. Offering deep discounts to generate more business may mean you don’t make a profit. Price your services too high and you’ll have trouble finding clients who are willing to pay. Pricing your services is a delicate process that needs to be done right the first time around.
3. Failure to Recruit Top Talent
Without top talent, your startup staffing firm will fail. Employers will be coming to you to do what they can’t–fill their open roles with the best candidates who have the skills and experience they’re looking for. If you’re placing candidates into roles they aren’t qualified for or into companies where they’re a poor cultural fit, you’ll have dissatisfied clients who likely won’t continue to use your services.
Before you start your staffing firm, make sure your recruiting and hiring process is flawless. Also ensure you’re reaching a wide enough pool of candidates to find top talent. Give priority to the candidate experience so great candidates will want to work with you. And always ensure you’re following up on references and background checks.
4. Poor Cash Flow
Cash flow is the lifeblood of any business. In fact, 82 percent of business ventures fail due to poor cash flow. Unfortunately, times are even tougher in the staffing industry, where staffing agency owners face upside-down cash flow.
While you need to pay your bills and your employees every two weeks or every month, your clients may not pay for 30, 60, or 90 days after services are rendered. You may have large gaps between when expenses are due and client invoices are paid. That’s why payroll funding is so important: It can help you make up for these gaps and avoid cash flow problems from the start.
5. Legal Compliance
Compliance is a big headache for most staffing firms, whether they’re startups or established agencies. Issues ranging from employee misclassification to health and safety, and employment standards to taxes, have taken down many thriving recruitment companies. When it comes to legal compliance, passing knowledge won’t cut it. You need expertise in staffing laws and employment regulations to avoid the penalties and lawsuits that might potentially sink your agency.
These are just some of the common reasons why startup agencies fail. Taking the time to create a solid business plan, and getting the right third-party support can help you avoid the fate of so many other failed staffing firms.