Tips for Consulting Firms: The Four Pillars of Sound Financial Management
With margins and profitability under pressure this year, many consulting firms are seeking to lower costs and improve their financial management processes. Deltek's new best practice guide advises how finance leaders can optimise their strategy and boost profit.
An environment marked by stiff competition, changing client demands and spending caution means consultancies are monitoring their expenses and financials closely. As a result, firms are pursuing several avenues to increase and protect their margins, from focusing more on new business development and delaying recruitment to more rigorous measures such as downsizing teams. Many are also turning to their financial processes for efficiency gains.
Deltek’s latest best practice guide informs firms how they can achieve sound financial management:
Pillar One: Invoicing and Collection
Review the invoicing and collection process, which should be streamlined with fee-earning operations and run on par with best practices. Cash flow is dependent on a firm’s ability to regularly send out invoices, and a process needs to be in place for the collection of these payments. It also requires stringent management of accounts receivables.
The challenge here is that while all attention goes to finance, a smooth invoicing process is highly dependent on the business. “It starts with timesheet submissions by consultants and approvals by project managers. In the case of expense approvals, a defined process between project managers and other cost centre leaders is key,” advises Deltek.
Pillar Two: Cost Control
Cost control can be a highly effective way to positively impact the bottom line. Achieving this goal can be done in multiple ways, for example by lowering out-of-pocket expenses for consultants, dropping or pausing certain expenditures, or reducing company-wide financial obligations.
A relatively straightforward starting point in this pillar is to improve purchase processes with approval flows, which provides better insight and can help drive down unnecessary spending.
The biggest variable cost, however, is most likely freelance or subcontractor costs for projects. It is crucial to ensure that purchasing processes are updated to reflect cost control. And over the longer term, with salaries typically the largest component of total expenditures, a well-balanced process for “sensibly managing annual pay rises” is recommended.
Deltek advises finance teams to apply standard sourcing best practices to their procurement spend, including the renegotiation of contracts for office space rental, IT equipment, and phones. Firms should instead introduce a PO process to better monitor spending versus budgeting.
Pillar Three: Order to Cash Process
Keeping tight control of the full order to cash process is the third area of focus, with improvements providing immediate relief to the working capital position. “Finance must always have a grip on working capital and cash flow. Without this control, the company may run short on capital and not be able to manage growth or daily execution,” advises the Deltek guide.
At the front end of the process, consultancies are urged to minimise the time between project sign-off and the actual start of the project. This is because the time between the two milestones can represent a significant number of non-chargeable hours for consultants, while they have already been assigned to a project.
Then, throughout the project lifecycle, putting in place robust governance around timesheet submissions and billing should be ensured. Here, finance teams are urged to work closely with project managers to ensure accuracy and improve invoicing processes wherever possible.
Pillar Four: Working Capital
To manage the end-to-end working capital process, finance teams need accurate reporting and smooth month-end processes. A key goal of the latter process is to ensure the income statement and balance sheet give a true picture of the financial situation, so there is a ‘single source of truth’ for all stakeholders within a consulting firm.
For that process to be accurate, cooperation with project managers is key: “Project managers must evaluate progress on fixed price projects and the value of work in progress (WIP) on time and materials (T&M). Project managers must be responsible for any write-downs and finish the income statement by validating revenue and post other costs,” Deltek advises.
Aligning Technology to Business Goals
As consulting firms seek ways to upgrade their financial processes, while ensuring the delivery of their projects remains on time and within budget, the guide goes on to emphasize the importance of having the right technology infrastructure.
Project-based enterprise resource planning (ERP) systems can lift financial operations to higher levels of maturity. By integrating project management with financial processes, an ERP can enable a unified view of an organisation’s data, which enhances decision-making. ERP systems also provide intelligent reports and dashboards that ensure leaders have the right information to deal with.
Last year around 30% of consulting firms were reported to have implemented a project-based ERP system, but that number is expected to increase in the coming years, according to the latest Professional Services Maturity Benchmark Report from SPI.
Automation of financial tasks meanwhile helps reduce manual errors and streamline processes, leading to faster billing and improved cash flow. “A project-based ERP system sets the foundation for sound financial management for consulting leaders and finance teams,” Deltek concludes.