Revenue. Gross margin. Net profit. Aged debtors. Uninvoiced hours.

If you don’t know where you stand on these at any given point then who in your business does?

As a founder or leader of a small consulting company preparing for growth, understanding and managing your financial performance is crucial. Effective financial management can be the difference between thriving and merely surviving. Here, we’ll explore the key financial metrics and the benefits of a weekly governance cadence to keep your business on track.

Revenue: The Lifeblood of Your Business

Tracking different types of revenue — budgeted, planned, requested, and sales revenue — helps build a complete picture of your business’s financial health. Regularly monitoring these metrics allows for better decision-making and understanding of business growth.

Benefits:

• Informed Decision-Making: Regular revenue tracking helps you make data-driven decisions, adjust strategies, and identify growth opportunities.

• Predictability: By understanding your revenue streams, you can better predict future income and plan accordingly.

• Resource Allocation: Accurate revenue tracking enables efficient allocation of resources to areas generating the most income.

Gross Margin: Measuring Profitability

Accurately allocating the cost of sales is essential. This includes all revenue-generating staff remuneration, overhead recovery, costs associated with managing your revenue-generating staff, and sales team costs. Proper allocation prevents artificially inflated gross margins and provides a true picture of your profitability.

Benefits:

• Profitability Insight: Understanding your gross margin allows you to gauge the profitability of your services and identify cost-saving opportunities.

• Cost Management: Effective cost management can improve your gross margin, ensuring your business remains competitive.

• Pricing Strategy: Knowledge of your gross margin helps in setting competitive pricing while maintaining profitability.

Net Profit: Gauging Financial Health

Maintaining a net profit in the 15-20% range is ideal, although higher margins are possible with high-margin intellectual property. If your net profit is below 10%, it suggests there is room for improvement. Consistent net profit is a clear indicator of your business’s financial health.

Benefits:

• Financial Stability: A healthy net profit margin ensures the long-term financial stability of your business.

• Investment Capability: Higher net profits provide the capacity for reinvestment in the business, driving further growth.

• Stakeholder Confidence: Consistent profitability builds confidence among stakeholders, including investors, employees, and clients.

Aged Debtors: Managing Cash Flow

Implementing an automated system for prompt follow-up of overdue payments is critical for managing cash flow. Quickly escalate overdue payments to identify if there’s a client liquidity problem or just a tardy accounts payable team. This proactive approach helps prevent significant cash flow issues.

Benefits:

• Improved Cash Flow: Timely collection of receivables ensures a steady cash flow, crucial for daily operations.

• Risk Mitigation: Regular monitoring of aged debtors helps identify potential credit risks and manage them proactively.

• Operational Efficiency: Automated follow-ups reduce the administrative burden and improve efficiency.

Uninvoiced Hours: Ensuring Complete Billing

Monitoring uninvoiced hours closely ensures you don’t miss billing for any work done, directly impacting revenue. Aim for zero uninvoiced hours by reconciling every month to avoid revenue leakage.

Benefits:

• Revenue Maximization: Ensuring all hours are billed prevents revenue leakage and maximises income.

• Transparency: Clear tracking of billable hours enhances transparency and trust with clients.

• Operational Insight: Understanding the extent of uninvoiced hours can highlight inefficiencies and areas for process improvement.

Finance Governance Cadence: Keeping Metrics in Check

Implementing a weekly and monthly governance cadence can help maintain control over these key metrics. Here’s a simple structure and suggested agendas:

Weekly Meeting Agenda

Objective: To review and ensure the company’s financial performance remains on track by addressing immediate issues and making timely adjustments.

Duration: 30-45 minutes

• Opening (5 minutes)

  • Quick recap of the previous week’s key points.

• Revenue Review (10 minutes)

  • Planned vs. Actual Revenue: Discuss any discrepancies.

  • Budgeted, Planned, Requested, and Sales Revenue: Update and insights.

  • Address any concerns or opportunities.

• Gross Margin Review (10 minutes)

  • Current Gross Margin: Discuss any significant changes.

  • Cost Allocations: Review and ensure accuracy.

• Aged Debtors Update (10 minutes)

  • Outstanding Invoices: Review and discuss overdue payments.

  • Follow-Up Actions: Assign responsibilities for overdue collections.

• Action Items and Next Steps (5 minutes)

  • Summarise key action items.

  • Assign responsibilities and deadlines.

  • Schedule follow-up discussions if needed.

Monthly Meeting Agenda

Objective: To conduct a comprehensive review of all financial metrics, ensuring the company’s long-term financial health and strategic alignment.

Duration: 60-90 minutes

• Opening (5 minutes)

  • Recap of the previous month’s performance and key points.

• Comprehensive Revenue Review (15 minutes)

  • Detailed analysis of Budgeted, Planned, Requested, and Sales Revenue.

  • Variance Analysis: Discuss causes and implications of any variances.

  • Strategic Adjustments: Plan for the upcoming month.

• Gross Margin Analysis (15 minutes)

  • In-depth review of the Gross Margin.

  • Cost of Sales Allocations: Ensure accuracy and discuss any changes.

  • Cost Management Strategies: Identify and plan for cost-saving opportunities.

• Net Profit Review (10 minutes)

  • Review of Net Profit and comparison against targets.

  • Discuss factors affecting Net Profit and potential improvements.

  • Strategic initiatives to enhance profitability.

  • Aged Debtors Management (10 minutes)

    • Review of outstanding invoices and aging report.

    • Follow-Up Actions: Plan for addressing overdue payments.

    • Risk Assessment: Identify and mitigate credit risks.

• Uninvoiced Hours Reconciliation (10 minutes)

  • Review of monthly reconciliation of uninvoiced hours.

  • Ensure all hours are billed and discuss any discrepancies.

  • Plan to address any issues and improve tracking processes.

• Strategic Planning and Adjustments (15 minutes)

  • Review strategic goals and financial targets.

  • Adjust plans based on the financial review.

  • Discuss any new initiatives or changes in strategy.

• Action Items and Next Steps (10 minutes)

  • Summarise key action items.

  • Assign responsibilities and deadlines.

  • Plan for any necessary follow-up meetings.

Benefits:

• Timely Adjustments: Regular reviews allow for timely adjustments to strategies and operations, preventing minor issues from becoming major problems.

• Enhanced Accountability: A structured cadence ensures accountability among team members and promotes a culture of continuous improvement.

• Data-Driven Insights: Frequent reviews provide data-driven insights, facilitating better planning and forecasting.

While there are many financial metrics you might monitor, these are the critical ones. For example, we virtually eliminated revenue leakage by shifting to a weekly review of planned versus actual revenue. This renewed focus came after a complex reconciliation for a client, where we found tens of thousands of dollars left unbilled due to poor processes and systems. This experience justified investing in an integrated Professional Services Automation (PSA) solution.

Managing financial performance through these key metrics and maintaining a regular governance cadence can significantly benefit your consulting business. By doing so, you’ll avoid potential pitfalls and set a solid foundation for growth. Remember, it’s not just about tracking numbers but using them to make strategic decisions that drive your business forward.

This simple guide aims to share insights from experience and help you navigate the financial complexities of running a consulting business. Remember these principles, and you’ll be well on your way to achieving sustainable growth.

TL;DR Summary

1. Track Key Metrics: Regularly monitor Revenue, Gross Margin, Net Profit, Aged Debtors, and Uninvoiced Hours to ensure financial health and informed decision-making.

2. Implement Weekly Governance: A structured weekly and monthly review cadence helps catch issues early, make timely adjustments, and maintain accountability.

3. Benefits of Monitoring: Proper financial tracking improves cash flow, profitability, and operational efficiency, setting a solid foundation for sustainable growth.