Many executives prefer to receive a bound package each month in which the following statements are included:
EXECUTIVE SUMMARY.
Often referred to as a “dashboard,” this one- to
two-page narrative summarizes key results and variances, pointing out the important issues an executive should know in case he or she were not able to study any other report in this briefing package.
PROFIT AND LOSS STATEMENT.
P&L should ref lect performance for
the month and year to date and be compared against budget, the last forecast (and any other quarterly forecast that the firm chooses to measure itself against), and the prior year. A variance analysis should accompany this statement that explains brief ly the reason for any material variance (e.g.,
±10 percent).
BALANCE SHEET.
This summary-level balance sheet shows key line items
within current assets and current liabilities as well as long-term assets and liabilities. The executive summary should discuss brief ly the changes in A /R
and WIP as well as current liabilities.
CASH FLOW STATEMENT.
The cash f low statement reconciles the change
in cash balance and details the major sources and uses of cash. Executives should pay particular attention to the first major subtotal that quantifies cash f lows from operations because, over time, this is a key indicator of the firm’s viability.
MONTHLY FORECAST.
This forecast juxtaposes actual results for each
month in the current year with projections for each of the remaining months of the year that, on a consolidated basis, will result in a forecast of the current fiscal year. This is arguably the most important report in the executive briefing package as it provides the best estimate as to the firm’s performance for the year and it is from that forecast that key strategic decisions must be made.
ACCOUNTS RECEIVABLE AGING.
This summary-level report of the aging
of A /R by client shows total balances by each 30-day aging period. Firm management should be particularly concerned with any balance outstanding more than 30 days and should take personal action on balances more than 60
days past due.
METRICS.
The firm’s performance relative to others in its industry should
be monitored and studied by senior management. To do that, certain ratios or metrics can be used as key barometers of the firm’s financial health. Chapter 2 details metrics appropriate for professional services.
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PROJECT/CLIENT COST ACCOUNTING.
To hold individual project or
client managers accountable for the resources they use, cost accounting reports should be reviewed and used to form the foundation for subsequent executive level project or client reviews.
TIMESHEET SUMMARIES.
Executive management should review statistics
on the performance of its most valuable and limited resource, its staff, and the number of hours available to charge to clients. Two reports are key to effective utilization of the firm’s staff:
1. Staff utilization: These reports summarize the number and percentage of hours charged directly to clients and to nonchargeable administrative efforts. Staff utilization targets should be established during the annual planning process and measured each month (e.g., staff should
have at least 90 percent of their time charged to clients; managers, 75
percent; senior managers, 65 percent; and partners, 50 percent).
2. Missing timesheets: Cost accounting in a professional services firm is meaningless unless all timesheets have been completed and incorporated into the cost accounting reports. If not well monitored by senior management, staff can fall behind in completing their timesheets as
they focus their efforts on urgent client demands. If staff know that management receives a written report on who is late in completing
their timesheets and follows up with firm support for their comple-
tion, the delinquency rate will be much lower than if such statistics were not publicized.
SUMMARY OF WRITE-OFFS/UNBILLABLE EXPENSES. This report pro-
vides executive management with a summary report of all amounts that the firm had to write off in the process of servicing each client, with a brief description of major items, to provide executive visibility with respect to mistakes and waste.
SUMMARY OF CAPITAL PROJECTS.
This report summarizes the status of
capital spending by listing each of the firm’s approved capital projects, the amount approved, the amount spent or committed thus far, an estimate of additional funds required to complete the project, the new projected total (actual plus the estimate to complete), and the resulting variance from the original plan.
DAILY CASH RECEIPTS REPORT. Although not necessarily part of the
monthly reporting package, it may be helpful to circulate a summary of cash receipts by client in order to keep executive management informed of each client’s payment status, particularly if the executive will be meeting with the client. This procedure helps to avoid situations where a senior member of the firm might be in a meeting with a client and inquires about the status of its
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unpaid bills. If the bills have already been paid, the executive can avoid the embarrassment of having to apologize for referring to outdated information.
GRAPHING RESULTS.
Many executives in large and small firms alike pre-
fer to review graphical renditions of their financial data to facilitate their review and understand results quickly in context of historical and relative trends. Key items that work well in graphical form include:
• Revenue and expense graphs: These combined line and bar charts show the firm’s actual results as a bar and prior year, budget, and forecast data as lines for all key accounts including revenue, salaries, and other material overhead accounts.
• Accounts receivable aging graphs: To track the effectiveness of the A /R
collection process, it is useful to graph the aggregate balance of amounts in each of the past due categories (e.g., all amounts over 60 days past due graphed over a two-year period).
• Staff utilization: Total hours charged, average rates, and utilization percentages over time can also be graphed.
Finance
There is a fine line between finance and accounting with many interdependencies and tasks being performed by the same personnel, particularly in smaller firms. A well-managed firm is one that has sufficient capital resources to weather storms, negotiate mutually beneficial deals with its clients, plan ahead, both in the short and long term, and invest in its future.
In this section, we distinguish those aspects of financial management that pertain to financing, planning, forecasting, and managing a professional services firm.
Capital Structure
Privately owned professional services firms typically rely on a relatively simple capital structure consisting of owner ’s equity in the form of owner ’s capital and retained earnings, leasing of facilities and major capital equipment, and limited bank financing, typically used to help fund working capital requirements. To manage its limited capital resources well, the firm must work carefully with its vendors and clients to negotiate payment terms that minimize the firm’s reliance on outside financing. Brief ly, smart ways to reduce working capital requirements and improve the firm’s cash f lows include:
• Invoice clients weekly or biweekly. Although this may conf lict with the client’s normal accounts payable process, if you can negotiate this type
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of billing arrangement, you should be able to accelerate your cash f low significantly while reducing total credit exposure.
• Collect A /R in a timely manner. Dedicate resources, including senior management attention, to collect all receivables within 30 days of the invoice date, with significant managerial attention on any item over 60
days past due. Inclusion of late payment charges (e.g., interest) in contracts and invoices also may be helpful in accelerating payment.
• Prebill. As described earlier, in certain situations you may be able to negotiate terms with your clients to bill them based on an estimate of the actual costs incurred, particularly when the project is large or you will be procuring a significant amount of goods or services on their behalf.
• Negotiate 45- to 60-day payment terms with vendors. When establishing a relationship with a vendor, particularly if it is one that will be long term, try to negotiate terms that provide for payment within 60 days, but no less than 45 days, unless the vendor is willing to grant discounts for prompt payment. Most vendors will be delighted to work with customers who always pay their bills within 45 days without falling behind.
Although the negotiations upfront are difficult, once the vendor agrees to it and you always make your payments on time, it will be a win/win situation for both parties. However, if you negotiate delayed payment terms and then fail to make payment within that period, your firm’s
credibility will be damaged and your ability to negotiate similar deals in the future will be impaired significantly. When asking for this concession, you must follow through and live up to your word.
Budgeting/Financial Planning
If you don’t know where you are going, any road can take you there.
—Lewis Carroll, Alice in Wonderland
Financial planning is an art that combines historical facts with subjective assessments of future events to project the firm’s financial performance in both the current fiscal year and in succeeding years. These future events could include winning new business, growing existing accounts, losing accounts/clients/projects, adjusting for staff compensation changes, as well as changes to all other cost components. The key in developing a forecast is to understand all assumptions, assess their probability of occurring, and quantify them in the form of both a high level long-range plan as well as a detailed annual operating budget. The remainder of this section addresses key planning process methodologies and issues.