Whoever said "Profits are an opinion, cash is fact" certainly had her or his head screwed on the right way around! This is a sentiment echoed by most consulting firm owners I meet. However, unfortunately I don’t often see this belief translated into the working practices of cash-flow management in their companies. It’s a common problem in the consulting industry, but this is an important equity value issue if you want to sell your firm. When your potential acquirer or investor takes a good look at your financials, good cash-flow management sends a very positive signal, whereas the opposite rings alarm bells.

So why is it a common problem and what can you do about it? The answer is easier than you think!

The scenario for poor cash-flow

Typically the way it works in a consulting firm…You’re approaching month end in August with an upcoming invoicing run and you need to pay your consultants. You chase your team for their timesheets and expenses so that you can bill your clients, however the law of ‘herding cats’ applies and whilst the timesheets are not a problem, they struggle with their expenses (because it’s a hassle!), in fact most slip to September! So there’s a delay in getting the bills out and your clients won’t receive their invoices until September month end. Your best clients will pay by the end of October, but other debtors may extend out to 60 or 90 days. Meanwhile you’re paying your employees on time, but it’s at least 90 days before you’re recovering costs and getting the cash in for work done. This gives you a working capital headache!

The root cause of the extended delay in this scenario is that the expense collection process is linked to the invoicing run. However even if you have the slickest process in the consulting industry, and everyone puts their returns in on time, at best you’re collecting money somewhere around 45 days after delivery. That doesn’t sound fair to me!! Most purchases I make require payment before, or on delivery, so why can’t we do that in consulting?

How to achieve a working capital requirement of zero

The first step is to divorce the two processes of invoicing and expense administration. When you write a piece of new business with a client, you ask for fees plus 15% for expenses (25% for foreign) and agree to reconcile against actual expenses every 90 days. Most clients like this approach because it’s predictable. Not only that, if there’s one thing that causes most billing arguments with clients it’s the expense charge and this method reduces the risk of conflict to almost nothing.

Secondly, you bill them on day one. Let me say that again…you bill them on day ONE. At this point I can hear many of you shuffling in your seats! I can honestly say that if you have difficulty with putting this to a client, then the problem is in your head and nowhere else. In my experience 8 out of 10 clients don’t even raise an eyebrow. This should at last be your start point when you sign a deal, the worst that can happen is you get into a debate and lose, but 80% of the time you’ll not even have to discuss it if you keep your nerve!

Do it this way and the phasing looks like this:

Day 1 – forward bill fees for next 30 days
Day 1 – forward bill expenses for next 30 days at 15% (25% foreign)
Day 30 – clients settle account
Day 30 – Pay consultants

Day 90 – reconcile expenses with client
Net Result - Zero working capital and cash positive

If you can put this into practice, then when a potential investor takes a hard look at your firm, you’re going to give them a very warm and confident feeling about your business and it will increase your chances of a higher equity value.


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About the Author

Paul Collins is Managing Director of business advisory firm Equiteq. Equiteq works exclusively in mergers and acquisitions (M&A) in the European consulting industry. For more information on Equiteq go to http://www.equiteq.com or call +44 (0)1252 724264.