Fighting the HR Industry: A Guide for CFOs

Nick Florio, partner, UHY

Over the past five years, CFOs have had no shortage of problems to solve and challenges to overcome. From the uncertainty of the Covid-19 pandemic, to trying to beat rising inflation, to ever-rising interest rates, CFOs across business sectors have become accustomed to conducting multiple fire drills at once. The challenges facing CFOs compound the fact that as the world continues to try to recover from a volatile economic period, CFOs are not only tasked with dealing with the most pressing issues, but at the same time are required to reorganize financial operations to better protect businesses from similar disruptions in the future. And perhaps nowhere does this cause more headaches than in the often overlooked HR sector.

Whether it’s unpredictable cash flow or high overhead costs, the human resources industry is an extremely demanding industry for CFOs and accounting teams, and poses a number of unique financial challenges. However, this does not mean that achieving success is impossible; it simply requires a comprehensive strategy that prioritizes financial visibility, accountability and efficiency.

With that in mind, here are some of the best practices CFOs should keep in mind as they look to address the long-term financial obstacles posed by the staffing industry.

Gap assessment

As with many businesses, the financial health of recruiting organizations is tied to the performance of many factors across their operations, including lead generation and sales, technology capabilities, and the overall efficiency of their internal workflows. Moreover, because of the interconnectedness of these components, without a proper understanding of how each component affects the other, “fixing” one area may have unintended consequences in another. So instead of digging into the details and making adjustments based on surface observations, CFOs need to take a step back and understand exactly what the HR organization is trying to achieve from a financial standpoint, what its current shortcomings are, and how each component helps or hinders the organization’s ability to achieve its goals. This starts with establishing a baseline of performance and comparing that target to your actual financial goals. With this foundational knowledge, HR CFOs can then begin creating a strategic roadmap, key metrics and progress benchmarks that will enable their staffing firms to achieve their desired financial results.

Establishing metrics

With this knowledge in mind, CFOs can then establish a framework through which the company will be able to achieve financial stability and catalyze growth. Of course, this is easier said than done. CFOs must find ways to manage and measure a myriad of accounting and financial tasks, including managing expenses, recognizing revenues across various revenue streams, and ensuring appropriate financial reporting controls and measures are in place to meet compliance and regulatory requirements. To achieve this, CFOs must divide these metrics into two camps: those relating to the balance sheet – such as cash flow, physical capital and days outstanding (DSO) – and those relating to profit and loss – including EBITDA, financial leverage and percentages. Establishing clear metrics not only allows companies to gain a detailed understanding of their growth trajectory, but it will also hold them accountable for that journey and allow them to make better decisions when unforeseen circumstances arise.

Setting benchmarks

Having guidelines regarding the functioning of the company is essential for modern companies dealing with employee recruitment. However, choosing the right reference points is a very delicate matter. The human resources industry is an extremely competitive industry that can be further divided into countless specialized sectors, so keeping up to date with how others in the industry are doing is of the utmost importance. That said, simply comparing yourself to others, regardless of their business maturity or key areas, is a big mistake and can result in companies making decisions that are contrary to what is in their best interest for growth in the short, medium and long term. . Properly performing benchmarking in the human resources industry requires CFOs to take a holistic view of performance metrics, including industry-published statistics, Bureau of Labor Statistics data, and other critical sources of information. The key metrics to keep in mind are:

• DSO – Days of sales outstanding management is critical to cash flow decisions. Industry standards range from 45 to 50 days, depending on the specific sector – in some industries, such as healthcare, as long as 75 to 90 days.
• EBITDA – Tracking EBITDA is another cash flow measurement that can also be compared to the industry in which you operate.
• Debt Service Coverage Ratio (DSCR) – Applying your own DSCR will enable you to monitor how much of your cash flow is being consumed by your debt. A good threshold here is to achieve a DSCR of 1.2 to 1.
• Monitoring working capital is also critical as it will be closely linked to other cash flow and debt metrics and will provide visibility into upcoming needs.

Closing your thoughts

As the staffing industry emerges from the particularly challenging markets of the last few years, finding stability will be a top priority. With these best practices in mind, CFOs will be able to help their companies find balance, build resilience and seize future opportunities.