With margins and profitability under pressure this year, many consulting firms are looking to cut costs and improve their financial management processes. Deltek’s new best practices guide advises how finance leaders can optimize their strategy and increase profits.
An environment marked by fierce competition, changing client demands and spending prudence means consultancies are keeping a close eye on their spending and finances. As a result, firms are looking at several ways to increase and protect their margins, from a greater focus on new business development and delaying hiring to more stringent measures such as downsizing teams. Many are also turning to their financial processes to increase efficiency.
Deltek’s latest best practice guide informs businesses how they can achieve sound financial management:
First pillar: Invoicing and collection
Review the billing and collection process, which should be streamlined with fee-earning operations and run on par with best practices. Cash flow depends on the firm’s ability to send out invoices regularly, and a process must be in place to collect these payments. It also requires strict accounts receivable management.
The problem is that while all the attention is paid to finance, a smooth invoicing process is very dependent on the business. “It starts with the submission of the timetable by the consultants and approval by the project managers. In the case of expenditure approval, a defined process between project managers and other cost center managers is key,” advises Deltek.
Second pillar: Cost control
Cost control can be a highly effective way to positively impact the bottom line. This goal can be achieved in several ways, for example, by reducing out-of-pocket expenses for consultants, canceling or suspending some expenses, or reducing the financial obligations of the entire company.
A fairly simple starting point in this pillar is to improve purchasing processes with approval flows, which provides better visibility and can help reduce unnecessary spend.
However, the largest variable costs are most likely to be the costs of freelance or subcontractor projects. It is essential to ensure that purchasing processes are updated to reflect cost control. And in the long run, when salaries are usually the largest component of total expenditure, a well-balanced process of “sensible management of annual salary increases” is recommended.
Deltek advises finance teams to apply standard sourcing best practices to their procurement spend, including renegotiating office leases, IT equipment and telephones. Firms should instead implement a PO process to better monitor spending versus budgeting.
Pillar Three: Order-to-Cash Process
Maintaining tight control of the entire order-to-cash process is the third area of focus, with improvements providing immediate relief to the working capital position. “Finance must always have an impact on working capital and cash flow. Without this control, a company may run out of capital and not be able to manage growth or day-to-day execution,” advises the Deltek guide.
At the beginning of the process, consulting companies are encouraged to minimize the time between signing the project and actually starting the project. This is because the time between these two milestones can represent a significant number of unpaid hours for consultants while they were already assigned to the project.
During the life cycle of the project, the introduction of robust management regarding the submission of work statements and invoicing should then be ensured. Here, finance teams are encouraged to work closely with project managers to ensure accuracy and improve invoicing processes wherever possible.
Pillar Four: Working capital
To manage the entire working capital process, finance teams need accurate reporting and smooth month-end processes. A key objective of the latter process is to ensure that the income statement and balance sheet present a true picture of the financial position, so that there is a “single source of truth” for all stakeholders within the consultancy.
Collaboration with project managers is key for this process to be accurate: “Project managers must evaluate the progress of fixed-price projects and the time and materials (T&M) work-in-progress (WIP) value. Project managers must be responsible for all depreciation and complete the profit and loss statement by verifying revenue and accounting for additional costs,” advises Deltek.
Aligning technology with business goals
As consulting firms look for ways to upgrade their finance processes while ensuring their projects are delivered on time and on budget, the guide further highlights the importance of the right technology infrastructure.
Project-based enterprise resource planning (ERP) systems can elevate financial operations to a higher level of maturity. By integrating project management with financial processes, ERP can enable a unified view of an organization’s data, which improves decision-making. ERP systems also provide intelligent reports and dashboards that ensure leaders have the right information to deal with.
Last year, it was reported that approximately 30% of consulting firms had implemented a project-based ERP system, but that number is expected to grow in the coming years, according to SPI’s latest Professional Services Maturity Benchmark report.
Meanwhile, automating financial tasks helps reduce manual errors and streamline processes, leading to faster billing and better cash flow. “A project-based ERP system creates the foundation for sound financial management for advisor leaders and finance teams,” concludes Deltek.
