Many healthcare staffing company owners tend to focus on the rounded number for gross margins in their business. There are important reasons for firms of any size to carefully examine and “chase the basis points”. A basis point is one hundredth of one percent, and to many, may seem too minor to track. After all, why micro-manage those tiny one-hundredth percentage points when whole numbers are much easier to work with?
The most important reason for chasing small margin increments is the ability to fund future growth. The healthcare staffing industry, unlike many industries, does not have the luxury of 30-day terms on most payables. Employees have to be paid in a continuous 1 to 2 week cycle and depending on contract terms, payment from clients may occur as much as 45 days AFTER the cash has been expended for the payroll period billed.
Two ways these basis points affect growth are cash flow and debt financing. Say, for instance, you are able to add 10 basis points, or 1/10th of one percent to your margin. Suppose you are running $1M a month in billing, this tiny percentage adds $12,000 per year to your cash flow. If debt financing is your choice, an additional $12,000 in interest over a year would provide close to an additional $200,000 for payroll funding. Next blog we will talk about ways to chase those basis points
