Four Tip$ to Combat Consultant’s Cash Crunch
Wednesday, September 28, 2011
Four Tip$ to Combat Consultant’s Cash
By Carol Phelps, CMC
businesses are often touted as the growth engine for most of the world’s
economies. Although championed as the desired model for creating substantial
job employment opportunities, and advancing key discoveries in technology and
science, small businesses have barely exceeded a 50% rate of survival after 5
or more years of operations.
behind the failure of small businesses are as complex and varied as the
millions of businesses which start up each year. There is pervasive evidence
however, that lack of financial management and adequate cash controls play a
significant role in the demise of small businesses.
they run out of money.
focuses on one of the key pillars of strong financial management especially for
consultants: Managing Cash Flow. Simply put, cash flow analysis examines the
timing of the intake of revenues against the outflow of expenses. As a
practical aid, Consultants must avoid the following four "traps" in
managing their practice:
1. Lack of Headlights into Financial
consulting firms, especially sole practitioners, often relegate the task of
financial management to a low priority ranking on their to-do list. Lead
generation, sales calls and scouting new clients are often given higher
financial reports such as cash budgets are important to providing early
detection of potential cash problems requiring corrective actions. Small
consulting enterprises should develop reasonable and conservative projections
for monthly, quarterly, and annual revenue and expense.
analyses should be conducted by line item on variances with +/- 10% deviation.
Consultants should establish a balanced scorecard for their business to include
cash flow measurement as a key metric of the health of their business.
planning and seasonality should be included in cash flow budgets so the business is poised to react quickly to
downturns in the economy and possible reduced demands for services.
2. Poorly Managed Accounts Receivables:
"cash is king” is a familiar refrain in the business world especially today
given the recent financial meltdown on Wall Street. Small consulting firms have
to implement creative ways to improve customer payment terms and cash
collections. Incentives for early
payments should be part of the terms and conditions offered to customers-
especially those who comprise a significant percentage of the accounts
software programs and technology should be implemented to flag any potential
delinquent accounts and business owners must take swift actions to collect all
outstanding invoices. Depending on the breadth of resources available, a small
consulting firm may decide to out-source accounts receivable management and
collections to industry professionals and specialists.
3. Heavy Investment in Non-Cash
consulting firms often allocate disproportionate amounts of money to expense
items such as salaries, furniture, space, marketing collateral and operating
expenses which tie up major chunks of cash which can be better used to either
cover expenses or invested in interest bearing accounts.
4. Maintaining too much cash on hand.
consulting firms can often become too risk averse and maintain large amounts of
cash which could be invested to earn a
rate of return which could be used to weather changing business conditions. A good problem to have, of course, but a
must have a solid understanding of their business model in order to adequately
forecast cash amounts which can be freed up to invest in instruments for the
appropriate period of time. Consultants must balance requirements for liquidity
with the opportunity cost associated with other options.
In the early
stages of a consulting practice, it is important to remain as flexible and
unencumbered as possible.
often experience these top cash flow problems when they do not adequately
maintain a relentless focus on their
income, receivables and payables. Many are left wondering how they went out of
business while their clients and revenues were growing substantially.
In the event
of persistent cash flow challenges, business owners need to immediately take
proactive measures to shore up their cash posture such as identifying ways to
decrease fixed costs, renegotiate payment terms with their major suppliers, and
seek help from banking institutions.
a successful consulting business is not a spectator sport, and inaction is the
surest way to a complete failure.
Carol Phelps, CMC, MBA is the CEO of Global Financial
Analytics, a management consulting company that designs and implements economic
and business development programs with an emphasis on emerging markets. In
addition to financial analysis, forecasting and planning, Carol’s expertise
includes project management, financial literacy training and business plan
development. Carol earned an MBA from Indiana University, where she was a
Consortium for Graduate Study in Management Fellow. Carol received her CMC in