Platt Perspective on Business and Technology

Consulting assignment life cycle 18: consulting as a business, and business financials 2

Posted in consulting, job search and career development by Timothy Platt on June 15, 2012

This is my eighteenth installment on consulting and the consulting assignment life cycle (see my Guide to Effective Job Search and Career Development – 2, postings 225-241 for parts 1-17.) I began a discussion of consulting practices as operating small businesses, and of taking a business model and a business approach to the practice of consulting in general, in Part 17 of this series. I focused on money issues there, and on working with and within client budgets. I also focused there for the most part on in-house consultants and on consultant employees of larger consulting service providers. They have to deal with and reconcile their employer’s budgets, and those of their client businesses that they work for as consultants so their situation highlights greater opportunity for having to understand and manage business expense related budget factors. To finish up on that, as a shared point of general importance with the issues I will turn to here, I note that a lot of the financial records keeping and management that these consultants have to take care of involve identifying and keeping track of expenses as they fall within one or more of three specific buckets:

• What the client business will pay for and to what expense levels,
• What the employer business will pay for and to what levels, and
• What the consultant has to pay for out of their own pocket.

A quick and perhaps too facile generalization might say that those first two bullet points simply collapse down to one for in-house consultants – employees who work full time for and within a single business but who are farmed out for their expertise and experience across the table of organization to take care of tasks that would not be cost-effective to manage from within those client lines on the table of organization, and more specifically by their client groups and teams directly worked with. But operationally and functionally, client and in-house consulting service budgets can be so distinct and separate that as far as cash flow is concerned, they might as well be entirely separate businesses.

And turning to the third bullet point of the above list, “what the consultant has to pay for out of their own pocket” can mean expenses that were not thought through and an effective, business-savvy consultant can sometimes both reduce their own out of pocket expenses and reduce the friction of resolving who pays for what, by working to get those details resolved in advance. I am particularly thinking of travel-related expenses here though expense planning is always important and for all parties concerned.

I said that I would turn in this posting to consider the stand-alone consultant, and I add the small consulting-firm consultant – and their individual expenses and finances. And I begin that by drawing a distinction with their more big-business employee counterparts as already discussed.

• In-house consultants and consultants who work full time as employees for larger consulting firms are for purpose of discussion of individual finances, simply in-house employees.
• They receive fixed base salaries or fixed hourly rate compensation plus bonuses in accordance with prevailing in-house regular employee standards for that business, industry and local.
• They also generally receive comparable benefits packages too, and for health insurance coverage, vacation days paid for and other issues. And bonuses are frequently set in comparable manners too, based on a combination of factors including individual performance and the reaching of stretch performance goals, and overall business success.

So I focus here on small consulting businesses and on stand-alone single employee/owner consulting practices – and on how compensation is handled for them and by whom.

• Here, a small consulting business is any consulting business that operates on a scale and with cash reserve limitations where member consultants receive compensation that is directly linked to current clients and the overall assignment compensation agreements reached with them.
• Small consulting business and stand-alone consultants negotiate single comprehensive compensation packages with their clients as part of the overall negotiations process in specifying and obtaining assignments.
• This has to be divided up to cover all expenditures, including but not limited to consultant compensation, fixed operating and other business management and development expenses, and tax payments. And as a significant cash flow consideration, tax payments can include quarterly or other pre-payments towards overall annual income taxes that will be due for the tax year.

Basically, consultants need to at least match in their consulting fees the total value that their skills and experience level in-house employee counterparts would receive as a total compensation package, for their consulting to be worthwhile, at least from a strictly financial perspective. This means they have to bring in from their consulting fee sufficient monies to at the very minimum cover to equal levels what they would receive as an in-house employee for the sum of:

• Their direct compensation – their salary.
• Their indirect compensation, including healthcare insurance and for themselves plus any discounts they would get for family coverage, paid sick days, vacation days and holidays, employer paid training, certification and/or licensure where that would apply, professional association memberships as they would apply and be required, and more.
• Look to the list of expenses and for both types and levels that would qualify as standard for your core industry and in your geographic area, and for your expected employed position level in determining baselines for both direct and indirect compensation levels to benchmark your situation from.

Now add in the financial impact of your receiving compensation as a consultant some X number of days receivable. In-house employees generally receive their pay weekly or at most every other week and salary is distributed on a regular, consistent schedule unless the employing business is in real financial trouble. Consultants may prefer to be paid 30 days receivable but some clients go 60 days receivable and I have worked with a few that actually let that slip to 90 days receivable. Whatever you reach agreement on, take that into account in determining your expenses and certainly where this holds potential for creating cash-flow problems for you. And add into your consulting agreements as a standard clause, allowance for an agreed-to percentage of fee increase if the agreed to days receivable is passed without compensation being paid. There are ways to negotiate terms like that, and any business that flatly refuses to allow for late payments is telling you that they will not meet the agreed to timeline for their paying for your services. So simply build that into the basic fees due for those clients if you agree to work with them at all.

I am going to turn to the issues of incorporation in my next series installment. Meanwhile, you can find this and related postings at my Guide to Effective Job Search and Career Development – 2. I have also posted extensively on jobs and careers-related topics in my first Guide directory page on Job Search and Career Development.

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