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5 Ways Professional Service Firms Struggle with Maximizing Cash Flow

The term “Professional Service Company” carries not only a lot of baggage but a lot of ambiguity, too. The strict definition is any organization or profession that offers customized, knowledge-based services to clients. Typically, we think about this as lawyers, consultants, architects, marketers, financial advisers, healthcare service providers, and so on. But the truth is, any company selling “information” with a combination of human interaction, and increasingly technology, would be considered as a professional service.

And it’s within this convergence of human-based services plus technology enablement that massive transformation is underway. Business models are changing. New entrants are entering, attempting to “automate” away from human interaction. Organizational structures are evolving with the freelance economy and telecommuting. Sales processes are becoming more advanced and refined. Basically, entire professional service industries are being tasked to find better ways to attract clients and solve longstanding problems.

All of this disruption creates urgency and variability for our professional service clients all while they are trying to streamline their core operations, improve cash flow and have the flexibility to consider some big strategic moves to stay alive and thrive.

Here at Stride, we have a lot of experience with professional service companies. Our implementation teams are constantly working to streamline process and implement the right systems to accelerate the cash cycle and improve transparency.  Here are some of the issues professional services face, plus how a good back-office strategy can alleviate the problems.

Incurring Expenses Well Before Cash Collection

The cash cycle of a business considers how long it takes to turn your service into cash. For most professional service companies, it’s about spending more on labor before collecting on that work. The collection model needs to be well oiled, starting with smart invoicing, which means knowing the client terms, contract status, and communication preferences. You also want to implement automated, rules-based communications to improve collection timing.  Additionally, it is important to manage accounts payable closely to maximize available cash. We like Bill.com for managing invoices and bill payments.

Uncertainty Surrounding Sales and Cash Collection

Very often, professional service firms have salespeople who are also the producers, similar to how lawyers get new business and fulfill that business. As a result, we don’t see the necessary discipline in sales pipeline management and forecasting. Getting a sales process discipline in place, like Hubspot, Salesforce, or Pipeline Deals helps remedy this. But it doesn’t stop there, you should also practice good cash forecasting methodologies to give clients visibility into their future cash flow based on existing client commitments and adjusting new business probability.

Team Members Time Not Being Optimized

Professional service companies must manage team utilization like hawks.  Too many people on the bench while still getting paid is a recipe for losing money. Consider utilizing contractors and having variable based compensation arrangements. Also, it’s important to make sure you’re charging enough to cover any low utilization periods. Cross-training staff and developing a recurring revenue service can help. For time tracking, make sure the system is integrated with a general ledger to avoid duplicating efforts. We like TSheets integration with QuickBooks.

Only Having A Few Large Contracts

We love closing the big deals, but large contracts can magnify the problems for professional service companies. Payment timelines get extended, customization requirements increase, and resources are stretched. While large contracts can be game-changers for companies, sustainable businesses are built when customer concentration is low and there is some client uniformity so standard processes can be applied.

Complicated Invoicing Adding Too Much Overhead

While managing multiple business models, both project and subscription-based, contractual structures become complicated. You have deposits, milestones, cost plus, time and materials, reimbursements, and more. Accounting processes must map these flows and align well with project management to make sure there is coordination. This is where new technology tools can bring significant efficiency and reduce errors! Time tracking tools, expense management tools, and integrations with the main accounting system can dramatically reduce both effort and time to consolidate all information required for invoicing. Ultimately, this leads to lowering working capital requirements and improving cash flow.

All of this is compounded further by the fact that in smaller professional services firms, often no single person is responsible for all of these organizational issues. A great accounting partner can help put in place processes and systems to help professional service firms operate in a healthy fashion, both financially and peace of mind. Reach out to us at Stride to learn how we can help you.

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