Unearthing Financial Potential in Your Consulting Firm
So, you want to start your own company. Let’s say you’ve worked for a number of years for some other consulting firms. Let’s say you have a lot of technical chops as a result of your education at a reputable engineering school, maybe even a masters or a Ph.D.; your design work for various clients, your earning of P.Eng. status, and your experience helping clients in the industry. Let’s also assume you learned from “XYZ” Consulting Firm what to do (and what maybe not to do) in business and in the business of engineering. Eager and armed with plenty of moxie and elbow grease, you set off to open your doors and bring in the clients!
But before you dive headfirst into things, you may want to ask yourself, “do I have a clear understanding and appreciation of the financial side of running this consulting business?”
Competition in consulting engineering (as this author was told by a “particular” person in geotechnical engineering), is very fierce and at times even cutthroat. The lowest price typically wins the bid, and there are more often than not, many bids on each project. Unfortunately, oftentimes, it’s usually the “cheapest” consultant who may have made an estimating error that wins the job and ultimately sets a new and lower industry bar for subsequent similar projects.
In addition to this unfortunate fact, lags in payment, lack of overhead control, and other finance-related issues can really mess with the success of starting your own firm. If you don’t have a reasonable and realistic profit margin target in mind, coupled with a clear blueprint on how to get there, some financial aspects of the consulting business can quickly sink your startup…why? because of…management of cash flow – the #1 cause of failure for new startups.
Different people have different definitions of what business success is, and some of these measures of success may not be linked to cash flow or your bottom line. One thing is certain, no-one likes to work for free and no company can withstand a negative profit margin “leak” for very long.
What does all this have to do with the financial aspect of starting or managing a consulting firm? Without a clear understanding of what your upfront and overhead costs are, as well as what profit you need in order to achieve “success”, you will put out false prices, either too high or too low, and your firm will wallow in financial underperformance. If you put prices out at false high prices, you will not get work and will be forced to adjust your prices, even if you don’t have a clear understanding of your costs and profit margins. If you continue to bid work at false low prices, you will continue to win projects that you cannot possibly turn a real profit on, creating a lower bar for pricing in the marketplace that cannot be sustained.
Let’s take a look at some of the specific things that can provide the keys to success for an existing or startup consulting firm:
- Key strategies are needed to maintain and improve profits, including, but not limited to:
- Aggressive, consistent and measurable revenue-driving mechanics (i.e. Marketing)
- Ensuring timely and accurate billings based on a rigid schedule;
- Assertive account collections, and;
- Timely financial reports, cash flow forecasts, and internal controls.
So, you might be saying to yourself, “these points are great, but where do I start?”. A good starting point would be to do an in-depth review of your forecasted revenue to ensure that it is adequate to achieve profit objectives…You would be surprised at the number of consulting firms who don’t do this.
Once you have established your profit objectives, how do you then achieve a greater profit? – by finding solid sources of revenue, starting with the “low hanging fruit”, like your existing network of clients and working your way outwards. You should also review and consider all potential avenues of revenue, regardless of how unorthodox they may seem–Find out which revenue streams represent the highest revenue for the lowest risk, then consistently and methodically market your firm to those who can positively influence your revenue.
When you have a steady revenue stream that’s generating real money, look for investment income opportunities for excess cash – things like short term GICs to maintain the liquidity of the cash in case it’s needed. You may decide instead to opt for reinvestment and growth with the spare monies.
Secure enough financing available to meet your daily, weekly, monthly cash needs. Sources of funds vary and could include owner’s capital, bank lines of credit, long term debt, mortgages, supplier’s credit, reinvested profits and shareholder loans. Prepare a detailed cash flow forecast for a minimum of six months – some do it for up to three years. Armed with this information you will know when to expect surplus monies or shortfalls and can take positive preemptive action.
Ensure billings are monitored for timely payments and aggressively pursue all accounts past their due dates. Remember, profit is not truly earned until the money is in your bank account! It is mandatory that billing responsibility be assigned to the consultants and collections assigned to an accounting staff member who can assist the consultant with the collections. While these responsibilities may be delegated, key people must accept responsibility for these two critical functions. The consultant must ensure that all changes are recognized and billed. Otherwise, you make endless unacknowledged “gifts” to the owner with a direct and negative impact on your profits.
Additionally, you also need to plan for the future by considering growth, replacement and succession planning. If you are too small to have the necessary expertise in-house due to cost but want to grow to ultimately handle larger and more complex projects, consider creating a permanent or temporary partnership arrangement with another firm until such time as you can handle the growth through increased staff.
Negotiate all major purchases for the best price and delivery dates. Improving negotiating skills takes time and practice, but profits can significantly improve when you understand how to negotiate at an expert level. Remember – one can only improve one’s position, with the worst position being the position at the outset of negotiations.
Insist on timely, effective “no fluff” cost reports that would allow you to prepare accurate cost trends to help guide you to take corrective action prior to the job completion. This item is critical to avoid cost overruns, which in most cases, clients often don’t want to pay for and therefore have huge potential to erode the margins/profit on a specific job.
Heading off conflict early by bringing cost overruns to the client as they happen and ensuring they understand the reasons is critical and can provide you with the ability to work under mutually agreed on “extras” under the original contract. Extras aren’t always a bad word, provided the communication and rationale for the “extras” are there and well understood by all.
Finally, implement internal controls to safeguard your assets with the most notable being: signing off on cheques, approving all EFTs after viewing supporting documentation, reviewing all billings, viewing all bank statements and reviewing estimated profits and cash flows on all new estimates as well as after a job is complete. By reviewing the information before, during and after a job it’s possible to clearly understand whether you are working for free or not, this then lets you make the required adjustments on future projects to consistently grow, improve and maintain a profit margin that provides for a sustainable business.
Don’t let poor financial planning be a contributor to the consulting industry race for the bottom by undercutting yourself with zero or negative profit! Understand your finances so that you can win great projects and achieve great success. Your success is not tied to winning the next project at all costs and staying afloat – aim for true and ongoing financial success by understanding your financials!
For the past 35 years, Mr. Wayne Newell has served in senior financial leadership roles and worked with companies throughout Canada, the United States and the Caribbean. His experience, financial expertise and guidance helps businesses improve their bottom line. If you would like to contact Wayne, he can be reached at firstname.lastname@example.org