Top CFO strategies for improving profitability for PSOs

Hey CFO - is your financial leadership mature? 

The mandate for financial leaders goes beyond traditional fiscal responsibilities; it now demands an acute understanding of innovation, risk management, and transformative strategies.

In this article and accompanying podcast with TimeLog’s CFO, Christian Hempler, we delve into the dynamic realm of financial leadership, unveiling key insights and KPIs that empower CFOs to navigate complex challenges and architect a future where financial excellence is the cornerstone of corporate success.

The five performance pillars

The Professional Services Industry Benchmark is a yearly publication that includes a benchmark with data from over 600 PSOs, along with a maturity matrix. This matrix helps companies define their maturity and competitiveness and guides what is needed to develop the business.

According to the benchmark, there are five key pillars in every consultant firm that needs to be optimised and worked on to drive a profitable and sustainable business. These pillars include operations & finance, leadership, service execution, talent & HR, and client relationships.

Each pillar is crucial for the company's competitiveness, and although they are separate entities (or departments), they are also interdependent.

Defining Finance and Operations

But first, let's briefly define what Finance and Operations are in the professional services maturity matrix context.

Finance: In business, finance is not merely about numbers; it's the lifeblood that fuels every operation. It involves managing profit and loss (P&L) while ensuring the financial health of a service organisation.

Operations: Conversely, operations encompass the day-to-day activities that keep the business running. It's about creating scalable and repeatable processes that drive efficiency and contribute to overall growth.

Now that we've set the stage let's explore why Finance and Operations are crucial.

The Finance and Operations Pillar: A Closer Look

In the realm of the professional services maturity matrix, the Finance & Operations pillar concentrates on two key aspects:

1. Managing P&L: Efficiently managing profit and loss is at the core of financial sustainability for a service organization. This requires keen financial acumen and strategic decision-making.
2. Building Scalability and Repeatability: Scalable and repeatable operations lay the foundation for growth. These operations should be designed to handle increased workloads without a proportional resource increase.

The Three Pillars of a Sustainable Economy

When the CFO pursuits a sustainable economy within a company, three pillars stand out:

Visibility and Insights: The ability to gain real-time insights into your financial and operational performance is paramount. It empowers you to make informed decisions and adapt swiftly to changes.

Predictability: Predictable operations lead to better resource allocation and risk management. It allows for smoother planning and execution of projects.

Standardisation: Standardising processes and policies across the organisation reduces errors and paves the way for improved efficiency and cost control.

The Maturity Scale for CFOs: Leveling Up in Finance and Operations

Understanding where your organisation stands on the maturity scale is crucial.

Let's explore the consequences of different levels:

Level 1-2: Organisations often operate entrepreneurially at these levels, addressing challenges. They lack efficient systems and standardisation, leading to missed opportunities and revenue loss.

Level 3: Organisations at this level establish processes, systems, and policies. While not yet a lean machine, they are in a much better position to optimize their business operations.

Level 4-5: Companies at these levels have well-integrated systems and processes, reducing non-billable hours significantly.

They emphasise standardisation in contract management and pricing models, leading to increased efficiency and profitability.

Immediate Improvements: Where to Begin?

The path to improvement varies depending on your current maturity level.

Investing in systems to support your business is recommended for those in the early stages. In more advanced stages, the focus shifts to fine-tuning and optimising the organisation through standardisation and policy implementation.

When fine-tuning your consulting business, keeping a close eye on key performance indicators (KPIs) within project accounting will help you ensure financial health, efficiency, and profitability.

The list of KPIs can be long, so here's a few to get you started

Revenue and profit margins: 

• Track project revenue to ensure it aligns with the company's financial goals.
• Monitor profit margins on individual projects to identify areas for improvement.

Utilisation rates:

• Analyse the utilisation rates of consultants to ensure that they are fully utilised and contributing effectively to revenue generation.

Billable hours:

• Keep an eye on billable hours to gauge the productivity and efficiency of your consulting teams.

Resource allocation:

• Ensure optimal allocation of resources across projects to maximise billable hours and avoid overloading or underutilising staff.

Project budget vs. actuals:

• Compare the budgeted costs with the actual costs for each project to identify any discrepancies and take corrective actions.

Project profitability:

• Evaluate individual projects' profitability to understand which projects are most lucrative for the company.

Client profitability:

• Assess clients' profitability to focus on those most contributing to the company's bottom line.

Cash flow:

• Monitor the cash flow associated with projects to ensure the company has adequate liquidity to meet its financial obligations.

Ageing of accounts receivable:

• Keep track of accounts receivable ageing to maintain healthy cash flow and promptly address any overdue payments.

Client satisfaction:

• Utilise client satisfaction surveys or feedback to gauge project success and identify improvement areas.

Project timeliness:

• Track project timelines to ensure that projects are completed on schedule, minimising delays and potential cost overruns.

Overhead costs:

• Monitor and control overhead costs associated with project delivery to enhance overall profitability.

Return on Investment (ROI):

• Calculate the ROI for each project to assess the financial success and identify opportunities for improvement in future projects.

Compliance with accounting standards:

• Ensure that all project accounting practices comply with relevant accounting standards and regulations.

Regularly analysing these KPIs will provide valuable insights into your consulting projects' financial performance and help you make informed decisions to optimise the company's overall financial health.

Closing Thoughts

In conclusion, a holistic understanding of Finance and Operations, as well as real-time analysis and timely reporting on essential KPIs, are paramount for the success and sustainability of a professional service organisation.

It's imperative to assess your organisation's maturity level and identify areas for improvement.

With the right strategy and a commitment to continuous enhancement, you can elevate your company to new heights, ensuring a prosperous and thriving future.

Meet CFO at TimeLog: Christian Hempler 

"I strive to bridge finance and commercial issues. To acquire, validate and disclose technical and general information at all levels of the organisation to understand the value of a product or project and bring these to tangible results," states Christian. Christian has been TimeLog's CFO since 2021. 

Connect with and follow Christian on LinkedIn. 

Listen to all episodes of Beyond the Benchmark

You can find all episodes - covering the five performance pillars - where you normally listen to your podcasts. You can also get an overview right here at our website.