Accountants

3 steps to actionable financial metrics for consulting firms

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Today’s consulting organizations and service-based businesses need to benchmark financial and operational data to improve continuously, drive growth, and remain competitive.

Identifying and evaluating available data and using it to define actionable KPIs can be a challenge. Especially as priorities can shift quickly, and the target keeps moving. Being able to pull it off demands not only the right skills but also a nimble technology infrastructure.

Firms that don’t pay close attention to these elements often find forecasting, adjusting, and strategizing difficult – to the detriment of their success and client satisfaction.

In a recent webinar with Consulting Mag, our own Brian Siefkes and Tania Zieja, CFO of Halloran Consulting, talked about core metrics such as cash flow, utilization, write-offs, and project profit and their role and the role of technology, in optimizing operations.

I’d like to highlight three steps Tania and Brian outlined that helped her firm measurably improve financial metrics.

Step 1: Build a financial infrastructure for sustainable growth

Before you can identify the best metrics for your business, you must ensure that the foundations are in place. For example:

  • How do you set up your general ledger?
  • How do you structure your business regarding departments, cost centers, regions, etc.?
  • Are there different tax entities?
  • Are you going to do consolidations?

Spending time upfront to figure out how exactly you want to structure things will save you many headaches in the long run. “One of the worst things that I see people do is when they start stacking this house of cards, and they just keep adding on and bolting and creating 100 different revenue accounts because they want to bucket things in different ways. It just makes it impossible to scale and really difficult to get down to the metrics that matter”, says Brian Siefkes.

Growing companies especially struggle with this. Metrics that seem sufficient initially may not be detailed enough after a period of rapid growth. “If you don’t classify it, it’s really hard to figure it out later on,” says Zieja. “I would try to be very optimistic with where you’re leading your firm and what you’re going to be looking at to help make data-driven decisions later on.”

Investing in your financial infrastructure means investing in being a better business. That’s why it’s critical to take the implementation of a financial system seriously. “The biggest pitfall I see is when people say, ‘just recreate our old processes in this new system,” says Siefkes. “That’s the worst. It drives me nuts.”

Step 2: Get actionable KPIs that your team can monitor

How do you measure project profit today? Are your projects repeatable, cookie-cutter, or specialized and different for every customer? If your tasks are repetitive and costs don’t fluctuate, you probably know what a project will cost you and what to bill. But no two clients are the same, so for most professional service companies, even repetitive projects tend not to be exactly the same. Unfortunately, that means your costs and profits aren’t the same either.

But what are the right metrics to track?

Here are some of the key metrics that matter:

Project costs

As a consultancy, you’re selling your intelligence; you’re selling your time. The only way to track that effectiveness is to track your time. Even if you don’t bill by time, it’s crucial to understand how much time client engagements cost you. Once you’re able to break down how much you spend on a client, you might find that big clients that generate a lot of revenue might end up costing you just as much.

“One of the more common things I see is a dependency on top customers and thinking that because they’re giving you a big check, that means that they’re super valuable and they’re the best. But the reality may be that they’re in your team’s ear 24/7, and the time spent on them is just eating away at all your costs. It’s hard to think of making up a big customer in the aggregate, but that might be the best route.”, says Brian Siefkes.

His advice: “Make sure that you’ve got the ability to bucket your costs and look at things in a very specific way so that you can have that analysis so that you can have that discussion. And maybe it’s not dropping your biggest client. Maybe it’s having a conversation, ‘Hey look, we got to bump up how much we’re charging you because this is what you’re doing,’ and you’ve got the proof. You’ve got the audit trail right here. This is what you’re costing us, so we need to figure something out.”

Utilization

Often considered one of the most critical metrics, Tania tells a story of how the Covid-19 pandemic has changed Halloran’s perspective on utilization. “Utilization was our main KPI. Now it’s just one PI. And the reason for that is, especially at the beginning of the pandemic, every time we achieved greater than 70% utilization company-wide, we heard the sheer cries from our people saying, ‘Oh my gosh, this isn’t sustainable. We can’t keep working at this pace.'”

“The interesting part is, as a company, we only recognized the revenue from billable time. We also track some non-billable activities, but not everything everyone does. And what I heard loud and clear from the employees was that we’d like to track more.”

“Furthermore, when I joined Halloran over 10 years ago, we tracked every single second. And that became tedious because I don’t necessarily need to know that someone’s checking an email. But what I do want to know is what does it take to run the business? What does it take to land new clients? What does it take to expand our business? What’s important and meaningful to our people? What are they choosing to spend their days doing? And within some parameters, whether it’s business development, professional development, client expansion, et cetera, I think that’s really insightful data.”

Project margin

Utilization doesn’t have to be the only thing to track. According to Tania Zieja, Halloran focuses on project margin, too. “Utilization is very ‘I’ focused,” says Tania, whereas project margins are team-focused. “What I really encourage all of the employees to do is to record all of their time, and it’s up to the project manager to determine if it’s truly billable or not.”

Billing cycle

How long does it take for your customers to pay? Brian Siefkes recalls how one customer found a creative way to track how much work they got paid for against the overall contract value:

“This company had set up a report that took their accounts receivable balance and work in process balance and compared that to the overall contract. They called it financial exposure. Their goal was not to get more than a certain percentage outside of financial exposure on any given job, and this was because they were having a hard time doing collections. So I’ve never seen anybody else do it. But it was a creative way to think about your financial health and cash flow.”

Write-offs

Lastly, while project profit is crucial, project write-offs are also essential to pay attention to, says Brian Siefkes. He says many finance teams don’t quite recognize the importance of write-offs: “they might be telling their teams don’t even enter time for it because we’re not going to bill it anyway. So that becomes an invisible write-off. It’s revenue that just leaks out the door and goes into that pile of 30% non-billable utilization time.”

Siefkes points towards potential ripple effects: you don’t enter time because you won’t bill for it. So you have revenue loss, and your utilization number goes down. Cashflow decreases because you’re not going to get as much. And as you bid on your next project, you’ll look back on the effort to get the previous one done, and you’ll bid based on flawed data. So now you’re caught in a cycle of unprofitable projects.

“While you don’t want to have write-offs, you need to use write-offs as your tool if you are expending more cost than you’re going to try to recoup. So yes, you definitely want your write-offs to be low, but you have to use them. If you’re not going to bill for the time, you still need to track that cost against your job. And if you’re going to send your invoice to your customer and you’re going to have that backup, this is how much time we spent on this; this is how much time we spent on that. If you’re not going to bill for all of it, show them.”

Step 3: Build a culture of financial responsibility

Getting all employees on board and creating a culture of financial responsibility is not easy. But, Brian Siefkes says, this kind of culture has to start from the top down. “You cannot let high performers and senior leadership get away with, ‘Oh, I’ll enter my time at the end of the month,’ or,’ I’ll do it this way.’ You just can’t do that.” Brian also shared a number of tricks, saying it’s all about how you incentivize your team.

Create a mentorship program

To engage the senior leadership more, Siefkes recommends recruiting them to help onboard more junior consultants and project managers. That way, they can learn from the best. “For the seniors, it can be a feather in the cap. But, it also helps them to have more motivation to adhere to some of those best practices that you’re trying to promote,” he says.

Daily time sheets

Tania Zieja says that Halloran requires daily timesheet submissions. “Back when we did a weekly timesheet submission, and I can tell you firsthand we were losing up to 50% of our data every week, and we couldn’t drive real-time data-driven decisions. We were driving decisions very reactively. That’s not how I want to run a consulting firm.” Switching to a daily routine, she says, allows her to understand what is going on at the firm date to date and be a proactive leader. She also says that timesheets must be bought into right from the top down to get that data in daily.

With the way Halloran set up their system, they reconcile their data nightly and expect every single person in the company to look at the dashboards regularly to understand how their projects are tracking and take corrective action if necessary.

Develop business acumen across the firm

Tania also says that education has been vital for Halloran. “Not everyone has the most incredible business acumen, and that’s okay, but that’s where organizations with infrastructure departments like finance, accounting, HR, you name it. They can really lean in and teach people what they need to know. So, for example, we offer monthly office hours and started with finance 101. We’ve been doing this for quite a few years. So that people can feel comfortable saying, “You know what? I hear this term utilization. I don’t know what that means. How do bookings play into this? When do you need my stuff in? Do you really need it daily?”

Answering their questions allows employees at Halloran to understand their true impact and the value of entering their time daily.

Don’t be afraid to ask for your money

Financial responsibility goes beyond tracking time and understanding KPIs. Once your team enters time daily and project leads look at financial reports, the invoicing process becomes much smoother. Because everyone is up to speed, there is less need to make adjustments and changes, which ultimately means that the invoice reaches your customer sooner. “For those net terms, their clock starts ticking when they receive the invoice, not when we’ve been thinking about sending them an invoice,” says Tania. “We do our best to turn around invoices within three business days. We try to do our entire month-end close within 10 days as well.”

That’s not always easy for a professional services organization because they’re selling time. That means dealing with timesheets and expense reports, depending on employee inputs. “The more you’re doing ahead of the month-end close, the quicker you can turn that around and convert what you’re selling into cash. So as soon as an invoice clicks over to the 30 days, we’re reaching out to them, and we want to make sure, number one, we have the right billing contact. You would be shocked at how many times you don’t have the right billing contact, and the invoice went to so and so, and it really should have gone to a different person,” says Zieja.

She says, even if clients have trouble paying, there’s always something that can be done. But you also have to show the people you’re working with that you have a quality product delivered, and therefore you should get paid for your services.

How technology can help

Whether you’re trying to improve cash flow, utilization, write-offs, or project profit, technology can help. It can optimize your operations by providing real-time data and complete visibility, automating tedious tasks, including time entry, and it even helps you by spotting accounting errors automatically.  Learn how Sage technology can support your consulting firm.

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