Commonly used as a term to define margin loss in business, Margin Erosion is a gradual reduction in gross profits. And as with the natural erosion of the environment; margin erosion can be a slow, subtle process that can go largely unnoticed, silently killing your business.
Margin Erosion in Temporary/Contingent Staffing & Labour Hire
In the recruitment industry, the most common culprits of margin erosion can be seen in errors in payroll and invoicing systems. While it is a massive issue for any business, the repercussions for labour hire and temporary contingent staffing and contracting businesses are greater because of all the variables that personnel costs attract.
There are many risks for employers, who are governed by the Fair Work Act 2009, when interpreting pay legislation for labour hire, temporary and contingent staff, and even contractors.
Here are just some examples:
- Statutory Costs
The complexity of Australia’s legislation is further compounded by constant changes, often including statutory costs such as Superannuation and Workers Compensation Premiums. Failure to keep on top of and implement these changes can cause your business to unknowingly incur costs mandated by a statute.
- Payroll Tax Exemptions
Paid by employers, Payroll Tax is a state tax on the wages; calculated by the amount of wages paid. But not all businesses have payroll tax obligations. Payroll Tax is payable by employers only if the taxable wages exceed the state threshold. As it is, each Australian state has a varying tax threshold.
In spite of high levels of credit control these days, many businesses are affected by debtors and aged invoicing. SMEs, for example, sometimes have no other option but to afford their customers late payment cycles; which in turn, can prove costly for SMEs and promote long term margin erosion.
- Insurance Premiums
The mounting costs of insurance tend to inflate the value of labour and products, prompting business owners to shrink their margins and offer discounts. Not only is this cycle harmful to your business, it devalues your product. Understanding the true value of your products and services is critical to pricing.
- Business Running Costs
Profit and Business costs affect every business by heavily influencing cash flow. In essence - the lower your business operating costs, the higher your profit.
But in our industry, which costs are significant, and how do you actually apply the most appropriate margin? There are many variables which need to be factored in when calculating the best profit margin for your business, and these include Cost of Goods Sold (COGS), Client demands, Reporting, On-boarding, and even and additional licenses.To get an accurate net profit margin, every expense must be considered including non-traditional expenses that are often missed. From there, if your margin is wanting then it may be time to consider other growth opportunities.
- Client Requests
Let’s have a show of hands of those who have agreed on rates with clients, before even truly understanding the complexity and full expectations of the client. And what about understanding the full requirement of what needs to be supplied to enable your contingent workers to perform their jobs? Personal Protective Equipment (PPE) is a common requirement, and is a significant one that can severely impact a business’ profit line and costs of sale.
Legislation Does Not Discriminate
In spite of the clear risks business are exposed to, it is surprising to note that many employers seem to think they are immune to them.
Let’s take a look at the 2014 case of Freelance Global Ltd vs the Chief Commissioner of State Revenue.
The issue at hand was whether Freelance Global’s distributions were taxable wages subject to payroll tax. The case takes several technical turns; but in the end, the Supreme Court of NSW ruled that Freelance Global was in fact an employment agent. As such, all distributions were taxable wages and subject to payroll tax.
Legislation does not discriminate, and in this case – the ultimate demise of a once successful business highlights the importance of interpreting all its areas accurately, as with keeping in compliance with it.
Getting a Handle on Margin Erosion
The risks of miscalculating pay and neglecting to update modern awards are great - and backtracking to fix these mishaps is a herculean task.
The RatesCalc™ platform helps business to accurately build quotes and invoices. It has been suitably designed to enable even the most administratively challenged to access all relevant components to easily build an accurate quotation. With all the current awards and agreements uploaded into the system, RatesCalc™ allows its users to price business solutions for each scenario - prior to and after changes and increases to these agreements.
Get in touch with RatesCalc™ to see how we can help you.