To say the professional services industry is growing rapidly would be an understatement.
With its value expected to rise to £5.8bn globally by the end of 2022, the stage is set for professional services to thrive for years to come.
But with that rising popularity comes a fresh wave of challenges for your firm to navigate.
From cash flow to utilisation and everything in between, time is literally money, and you need to know how to make more of both.
Read on to take a closer look at the top five key challenges facing professional services firms like yours, and how you can tap into tech to overcome them.
Here’s what we cover:
1. Invoicing errors
Cash flow – the money flowing in and out of your business – is something that can make even the most experienced finance professional sweat.
Invoicing errors aren’t just a little inconvenience.
Reissuing invoices has a domino effect that could translate to a 7% increase in project cost overruns and an 11% drop in your team’s ability to deliver projects on time.
And this can come down to technical issues such as time-coding errors, or good old-fashioned human error.
Employees might forget to input time, put it in the wrong place, or add the wrong labour code to the system.
Using the right cloud finance software here eradicates hiccups such as these, streamlining the process and allowing your business to spend less time on admin and more time on what matters.
Remember: if your project manager doesn’t catch the error, your customers certainly will. And that kind of mistake can be a little embarrassing and give the impression of chaos behind-the-scenes.
Protect your brand by keeping those accurate invoices flowing.
2. Lengthy billing cycles
There’s a lot more to healthy cash flow than just issuing invoices properly.
Enter, billing cycles.
If you bill for your services on a monthly basis, you might rack up an expense or labour cost on the first day of the month, bill for it on the last, and collect it another 30 to 45 days later.
And that’s if things go smoothly.
It’s not uncommon for companies to take an additional five or 10 days to prepare and send their invoices to customers.
There are a few different actions that can lead to a billing cycle bottleneck, including:
- Late time entry
- Long or complex review process
- Complicated manual invoices
Depending on the complexity of your billing process, it could take up to 10 days to get your bills out the door and in paying customers’ hands.
Serving your project managers real-time financial data for each project would help cut that time and let them know what needs to be on the invoice ahead of time, allowing them to act on any time-entry errors before they actually happen.
Cloud software will also allow you to create a digital invoice review process – complete with handy notifications – that makes it easier for everyone to stay on task and keep things moving along swiftly.
Traditional accounting systems don’t have functionality for the heavy lifting needed here, so that’s worth keeping in mind if you’re considering an upgrade to your current setup.
In practice: Bossing your billing cycle
Cutting your billing cycle down to size might seem small, but it has some serious financial benefits.
For example, if your company is making £25m in annual revenue with an average cycle of about 45 days, reducing it by 10% could translate to an extra £340,000 in the coffers.
This is basically how professional services do resource management.
Utilisation – the percentage of time each employee spends on projects – is ultimately what determines the success of your business, so you need to keep a close eye on it and make sure you’re maximising those billable hours.
Fail to manage your resources well, and those lost minutes quickly add up to hours, so keeping track of time is vital here.
Because this is such a fast-paced industry, it’s normal to see employees forget to input their time daily, and that’s understandable.
Why not make it easier for your team to improve their time tracking by providing a quick, straightforward process on software they can use anywhere, on any device (desktop computer, laptop, mobile phone, tablet)?
While you’re at it, encourage employees to update their timesheets daily, and to include time spent on administrative tasks too.
“We were stuck in the day-to-day weeds of closing the month. We’d get two days to breathe after the close, but couldn’t analyse the data or get new projects done – there was no time. Now I can look at my dashboards and reports and know that the data is solid and literally up to the minute.” – Tania Zieja, CFO at Halloran Consulting Group
You’ll quickly find that some of your best talent is being underutilised, and need more billable hours, while others might be overstretched and at risk of burnout.
Use that information to balance your team and your books more effectively.
From disputed charges to reworks and discounts, write-offs can cost your company a bomb if left unchecked.
Also known as ‘revenue leakage’, write-offs are bits of revenue that you did earn, but weren’t cashed in for some reason or other.
The number one cause of revenue leakage is probably under-bidding contracts.
If you’re starting your project off by charging too little and taking on too much work for the resource you have, you’re on the wrong track – and that’s going to cost money down the line.
To find out how your firm is doing, just compare your write-offs to your labour revenue.
If you’re around the industry average of 4.3% – which is pretty high – then there are two changes you can make right now to knock that down and keep more money in your pocket:
- Quote projects based on past performance, not past contracts
- When changes are needed, bill for any additional work done
What it all boils down to it is the equivalent of managing customer expectations in professional services.
Clarity and good communication are priceless here.
5. Payment collection
Whether you’re a freelancer or thriving firm, chasing payments is never fun.
The longer the collections process takes, the larger the strain on your financial health and the greater the chance of building up bad debt and write offs, not to mention the stress associated with late payments.
These delays usually come from things such as billing disputes, calls for clarification, and the customers who just like to wait until the last minute to settle up.
But there are steps you can take to make life easier, such as offering incentives to customers for paying early.
You could also change your payment terms so they make more sense in practice, perhaps switching from 30 days to 14 or even 10.
If you’re working with larger companies, do some digging to understand their payment process, and make sure you invoice just before they cut their AP checks.
Next steps: Track the professional services metrics that really matter
There’s no one-size-fits-all solution to the challenges professional services firms need to overcome. But there is one sure-fire way to understand exactly what you need to do to grow your business and not just increase revenue, but do it efficiently: tracking specific professional services KPIs.
Use those metrics to work out which areas of your business are doing great, which ones need some work, and what kind of growth strategies you need to put in place to create that positive change.
6 key metrics for professional service organisations
Discover the KPIs that can help you benchmark your firm's financial data and identify where you need to focus as you strive for continuous improvement and growth.
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