With the unique business model used by these companies, and the myriad ways to make money, accounting for staffing firms can present a number of unique challenges. Chief among these are accurately recognizing revenue from income sources, managing expenses, accurate financial reporting, and the many different aspects of legal and tax compliance.
As such, efficient bookkeeping practices are essential. Below, we’ll discuss accounting best practices for staffing firms, to help you maintain financial stability.
Understanding Accounting for the Staffing Industry
The distinctive financial aspects of accounting for staffing firms, like fluctuating workforces and diverse revenue streams, make accurate financial management essential.
This starts with the accounting system you use. Whether your business uses accrual and cash-basis accounting depends on the nature of your income. A cash-basis system focuses on your cash flow, so you’ll record payments when clients pay their invoices. With accrual basis accounting, revenue is recorded when you finish a project, even if your client hasn’t yet paid for your services.
Next, it’s important to decide between cost and project accounting. Most staffing firms use cost accounting to manage expenses for employees that are placed permanently, and therefore seen like a once-off transaction. This is particularly useful for establishing labor expenses, as it helps determine the cost of each employee, from salaries and contract fees to benefits. That way, it highlights ways to reduce costs and improve productivity.
Project accounting is better served for contractual employees, or leased workers. Here, you can track the costs and revenue associated with each hire. This helps with project and resource management.
The importance of accurate financial management
With the number of financial considerations in accounting for staffing firms, accurate financial management is crucial. This specifically includes payroll and benefits management, invoice and revenue tracking, expense management, cash flow management, and budgeting and forecasting.
Efficient accounting practices will not only allow for strategic financial planning, but will help that firm remain compliant with the many legal obligations of US staffing. Importantly, it will also assist with tax compliance. After all, complete and up-to-date financial records are essential for tax filings. Without this, your firm risks facing penalties for non-compliance.
Best Practices in Revenue Recognition
According to the Financial Accounting Standards Board (FASB), revenue recognition in accounting for staffing firms falls under Accounting Standards Codification Topic 606 (ASC 606) In a nutshell, revenue is recognized to illustrate the transfer of your services to clients.
The FASB breaks this down into a five-step process, in which you identify the contract, specify separate performance obligations, determine a price, allocate the transaction, and recognize revenue.
But in the context of staffing, revenue recognition isn’t always quite as clear-cut. For instance, you may have revenue coming in from a variety of sources, along with a diverse array of expenses. And both affect how you should recognize revenue.
Moreover, the process depends on whether your firm is considered a principal or agent. If your firm has control of a service before the transaction, and then relinquishes this control (as it would with permanent placements), you’re generally considered a principal. In this case, revenue is recognized for the gross amount received for your services.
Also, when it comes to leased workers or temporary placements, your firm is considered an agent. Here, you arrange for another party to provide services to the end client. An agent recognizes revenue at the net amount, or based on your commission fee.
Essentially, your firm can be both principal and agent, depending on how your staff is placed with clients. This has complex practical implications for your firm. It means you will need to apply different revenue recognition methods for the same transaction. As a result, your financial reporting and compliance can be even more complicated.
Handling diverse revenue streams
Many staffing firms receive income based on performance. This includes success fees, placement revenue, and bonuses. Under ASC 606, these types of revenue need to be recognized as part of the initial transaction price of your employee contracts.
But what if you have agreements in place that allow for variable payments, like volume discounts, rebates, or price concessions? These also need to be estimated (using historical data) to be included in revenue recognition processes.
And then there are the costs incurred to acquire a contract. Under ASC 606, these need to be recognized as assets subject to amortization, rather than expensed. All of this can seriously complicate accounting for staffing firms.
If you’re unsure of how exactly your revenue should be recognized, consult with a tax professional for best practices.
Effective Expense Tracking and Management
Like revenue recognition, effective expense management is crucial in accounting for staffing firms. This includes expense categorization, tracking, and regulatory compliance.
For most staffing firms, categorization of expenses can broadly be divided between direct labor costs and admin expenses. The former are directly related to your employees, like salaries, benefits, payroll taxes, or background checks during the hiring process. These are crucial for accurately determining the profitability of each hire.
Administrative expenses are your operational costs. As such, they may include rent, insurance, office supplies, or legal fees.
Separating these expense types helps with cost analysis and pricing, financial reporting and budgeting, as well as performance evaluation. It also assists with regulatory compliance and transparency. After all, some expenses are treated differently for tax purposes, such as deductions or credits.
How to manage expenses
An easy way to ensure accurate expense management is to conduct activity–based costing. Here, you allocate costs to specific clients based on the activities that generate those expenses.
Training your finance team and implementing clear expense policies can also greatly improve expense reporting.
Finally, regularly review and analyze your expenses to identify trends, inefficiencies, or areas for cost savings.
Financial Reporting in the Staffing Industry
Like all US businesses, accounting for staffing firms relies on three main types of financial reports for efficient management and regulatory compliance. These are:
- An income statement (or profit & loss statement). This details your revenue after costs to indicate profitability. As such, it can help you with budgeting and forecasting. For staffing firms, this report helps monitor the cost of labor.
- Balance sheets. These show your business’ assets and liabilities, and are often needed for tax filing. By monitoring this report, your firm can better manage liquidity and cash flow.
- A cash flow statement. This records money going into and out of your firm, and is essential to determine your financial health. It’s usually broken down into operating, investing, and financing activities. Because of the unique nature of staffing business models, efficient cash flow is crucial.
By regularly reviewing and analyzing these reports, you can do more than manage finances. You can identify financial and business trends, to make informed business decisions.
Adhering to Compliance and Regulatory Standards
The staffing industry is subject to a number of legal and tax standards, with heavy penalties for non-compliance. Moreover, these vary on local, state, and federal levels. Common laws that can affect your firm include:
- Civil Rights Act. This covers selection, firing, and management of employees.
- Equal Pay Act.
- Age Discrimination Equality Act. This applies to hiring, compensation, benefits, and termination for firms with 20 or more employees.
- Rehabilitation Act. Here, programs and activities that receive federal funding are prevented from discriminating against disabled people.
- Fair Credit Reporting Act (FCRA). This specifically applies during background checks in recruitment.
- Immigration and Nationality Act. This ensures that your firm only hires people eligible to work legally in the United States.
- Family and Medical Leave Act (FMLA).
And then there’s the issue of tax compliance, especially with regard to withholding taxes, and worker classification.
Misclassification can lead to serious consequences, including fines and legal action.
Best practices for maintaining compliance
With the amount of laws governing accounting for staffing firms, compliance is essential. Armed with the below tips, you can mitigate the risks of non-compliance.
Start with a compliant hiring process, which adheres to relevant laws. With a standardized recruitment process, you’ll ensure fair treatment of applicants and avoid potential lawsuits.
Next, always keep detailed records. With accurate records of employee onboarding, training, performance evaluations, and contracts, you will have sufficient evidence for tax filing. It’s also a good idea to implement regular internal audits and reviews, to pick up any errors before these escalate.
Finally, make sure you keep up to date with all regulations and reporting requirements. These change over time, and by partnering with a legal or tax professional, you can ensure continued compliance.
Leveraging Accounting Software and Tools
Accounting for staffing firms requires specialized software. Software like NetSuite or QuickBooks can streamline financial management, give you detailed reports and breakdowns, and ensure regulatory compliance.
Using tailored software can also help your finance team avoid mistakes that could lead to costly errors. In addition, they add a level of security (especially if cloud-based) for added peace of mind.
Another benefit of accounting software is that a lot of the grunt work in financial management can be automated, saving your team time. For example, you can automate invoice sending, report generation, vendor payments, and generation of tax documents.
Accounting software can also be integrated with other applications. This includes payroll and customer relationship management (CRM) systems, to streamline operations across departments.
Building a Strong Financial Foundation
Training your finance team is an essential component of accurate accounting for staffing firms. It ensures that your staff follows standardized procedures, for accurate financial records, while maintaining efficiency and productivity.
Partnering with CPAs for expert advice can also help with financial management and greatly reduce the burden of accounting. CPAs offer you specialized advice and guidance on best practices for revenue recognition, expense management, compliance, and much more.
For expert assistance with accounting for staffing firms, schedule a Discovery Call with one of our CPAs.
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