Professional services firms are unique entities. For them, hard assets like inventory, furniture, and machinery which are common in many businesses, are relatively few. Instead, their assets are their people. Some may think that makes financial management and strategic planning in a professional services firm simpler. Let’s tap the brakes on that viewpoint.
Fundamentally, leaders of professional services firms understand that their people need to be utilized effectively and efficiently, that pricing must sufficiently cover overhead, and that finance and HR processes must be compliant and complete. Rising above the competition requires more than the basics. It requires a shared view of where the business wants to be in the future, steadfast strategic focus, and the ability to assess progress and potential course corrections at any given time. Below, we dive into what successful professional services firms do and what an experienced CFO adds to the mix.
Businesses without a clear long-term vision often do have a recurring (typically annual) budgeting process that aims to turn a profit and keep the lights on, but that alone leaves them rudderless and prone to growth that’s extremely slow and painful. This approach often manifests itself through mental exercises of “we did X in revenue this year and want to do Y% more next year,” but lacks sufficient thought and planning as to how that’s going to happen.
A good CFO will guide business owners and leaders in first answering key questions such as, “Where do you want the business to be in 3/5/10 years?” “What is your long-term plan for the business?” “What type of exit or transition do you envision?” Visualizing and articulating goals for the business provides an endpoint that one can then walk back year-on-year to chart milestones, build meaningful budgets, and form the basis of the strategic plan. Having these elements in place provides a path that everyone in the business can follow, be passionate about, and take shared ownership in.
Sound financials are vital for planning and building credibility with key stakeholders such as investors, creditors, analysts, and others. Once in place, controllers and accountants are adept at preparing these statements to show the current state and what happened to get there. This includes putting the right costs in the right buckets to show whether the firm has sufficient delivery resources to support revenue goals and cover overhead. Financial statements are important measurements of performance; however, they are always looking back. It’s also important to remember that financial statements aren’t meant to show right or wrong, but rather why things are occurring the way they are and why they may be different from what was expected and planned.
A CFO brings a strategic and future-focused perspective to the conversation and evaluates risks and opportunities in their review of the financials. They ask questions to stimulate thinking and serve as a “canary in the coal mine” to steer the business clear of pitfalls. They add foresight that shows what will happen if the current course is maintained and raise decisions that need to be made, beyond just interpreting the numbers. They are going to be particularly focused on whether the current results are driving toward the goals of the organization and the strategic plan, and if not, what course correction is needed.
Measuring what matters means putting the right Key Performance Indicators (KPIs) in place to measure performance. More metrics does not equal better performance, so it is critical to pick the right ones for the business. Professional services firms should adopt three to four lagging indicators, and three to four leading performance indicators that highlight plan-to-actual information and how the business is doing relative to others in the industry. These can be developed using competitor benchmark data for the firm.
Three important lagging indicators for professional services firms are revenue, project profitability, and utilization. While revenue and project profitability are rather self-explanatory, utilization is not as clear. What utilization indicates is the degree to which the firm is putting the right resources on the right projects. For example, are high-level resources being allocated to low-level project work in too many cases? Do different job levels need to be established so that profit targets can be achieved more consistently?
Leading indicators provide a view of what’s ahead. This includes a clear and objective view of the sales pipeline (not rosy estimates) and a forecast of scheduled billable hours. These in turn inform forecasted revenue and cash flow. Leaders of professional services firms, like all firms, can also sometimes fall into a trap of believing that achieving a great profit automatically means that their cash is going to be okay. Pay attention to receivables timing and cash obligations beyond the income statement (such as debt and capital purchases.)
Putting the practices outlined above into place works. We recently worked with a professional services firm that was frustrated by continually hovering around the $15M mark year after year. They couldn’t seem to move beyond that. When engaging with them, we took a deep look at all the areas outlined above and closed several gaps that had been open for some time. Three years later, they’re now on track to generate $40M in revenue this year and are poised for further growth. Better yet, this support was all provided on a fractional basis, meaning they did not have to take on the cost of a full-time CFO to make it happen.
The fractional CFO process meets clients where they are and matches them with the right resource to accomplish their objectives. Fractional expertise enables firms without budget for a CFO to draw on the expertise of a deeply experienced CFO on a limited basis. This also unlocks access to a range of specialty expertise – mergers & acquisitions, investments, debt structures, human resources, and more. Tap into this resource for unmatched thought partners and trusted advisors that professional services firms can leverage to optimize growth.
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