May 17, 2022

Understanding the profitability metrics for your Outstaffing company

Annie Garland

Profit or Loss Statement 

A profit or loss statement is a financial statement that shows you how profitable your business was over a given reporting period. It shows your revenue, minus your expenses. Also sometimes called an “income statement” or a “statement of earnings,” the profit or loss statement is one of the four most important financial statements.

How profitable is your business? The only way to really know is to create a profit or loss statement.

The information in your company’s profit and loss statement can help you calculate the key profitability indicators for the Outstaffing industry which are:

Net profit

Often referred to as the ‘bottom line’, your net profit, also called “net earnings,” is the total profit for your business after subtracting all costs.

Net profit margin

The net profit margin is one of the most closely tracked profitability metrics in finance and It measures how well your company does at turning revenue into profits – how much profit you earn for each £/$ of revenue – as a percentage. 

Net profit margin is calculated as net profit/revenue x 100.

Gross profit

This financial performance indicator refers to your total revenue minus the cost of sales (COS). For an Outstaffing company the COS will be the cost of the developer that is recharged (hired) out to your client – their salary, or daily/hourly rate x days/hours worked etc.

Gross profit margin 

This performance metric shows the percent of sales revenue that you keep after deducting all direct costs (COS) associated with your sales and is one of the most important measures for an outstaffing company. 

Shown as a percentage, the formula to calculate gross profit margin is as follows: 

(revenue – cost of sales) ÷ revenue = gross profit margin. 

The benchmarking industry standard GP margin for an Outstaffing company is anywhere between 25% – 45% with the median being 37%. 

Compared with industry average, a lower percentage gross profit margin is indicative of inefficiencies – developers on the bench for too long, problems with early cancellations etc – or a poor pricing strategy. Each £/$ generated from revenue contributes towards the company’s indirect costs and margins must be sufficient to generate a net profit.

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Mark-up

Mark-up is the difference between the cost of your developers and the price you charge to your clients for that developer. Linked to gross profit margin this metric is shown as a percentage it is calculated as – 

Gross profit ÷ cost of sales x 100

Break-even

Break-even is the point at which your company’s revenues precisely equal your expenses. You are not losing money, but you are not making any either. It’s where the profits are zero.

Depending on which calculation you use, break-even analysis shows either 

  • how many developers you need to have out on placements to cover all your fixed costs 

or 

  • the sales value in £/$ needed to cover all your fixed costs

Compare your numbers

The analysis of the profit and loss statement involves comparing the different line items within a statement (line item analysis), as well as following the trends of individual line items over multiple periods (horizontal analysis). 

Horizontal analysis is a side-by-side comparison of profit and loss categories for multiple periods and can identify increasing (or decreasing) spending on a category or changes in prices. A good comparison is for every month or every quarter.

Line item analysis looks at each category of expenditure and is used to understand the cost structure of a business. Calculating each category as a percentage of sales can identify which type of expenditure has the biggest impact on your profits and can identify costs which vary in line with changes in sales revenue – for example software costs/software subscriptions are likely to be variable, at least partially, in line the number of developers you have.

Understanding your profit or loss statement and key performance metrics will help you make good financial decisions on behalf of your Outstaffing company.

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