According to the Business Research report, the global professional services market has grown exponentially, from US$6040.91 billion in 2021 to US$6697.56 billion in 2022 at a compound annual growth rate (CAGR) of 10.9%. Professional services firms that prioritize financial planning and implement the right financial strategy gain a competitive advantage, utilize resources efficiently, fulfill commitments to stakeholders, and plan financial success in the long run. Without the right financial planning, even viable and potentially profitable professional services firms fail.
If you are a professional services company, adopting proven financial planning policies can help you boost revenue, reduce expenses, and stay on top of your business finances. Here are 15 financial planning tips that professional services firms should follow in 2022 to achieve financial stability.
1. Prioritize Financial Planning
Solid financial planning is key to the long-term success of any business. An optimal financial plan lets professional service firms gain a complete view of current assets, budgets, revenue, and tax, helping them achieve their financial goals. Creating concrete financial planning is essential to lowering your expenses and maximizing your savings in the long run.
Imprudent financial planning can be detrimental to the success of your business. A poor financial plan negatively impacts all aspects of a business – from forecasting to planning and from inventory investments to cost management capabilities – resulting in reduced revenues and higher costs.
2. Create a Budget Plan for the Financial Year
Many professional services firms fail because of inefficient budget planning and inadequate cash flow. First, a professional services firm should create a budget to seamlessly manage the upcoming financial year. A budget is essential for narrowing down day-to-day revenue, making expense decisions, allocating resources, and supporting long-term fiscal goals. When you know your costs well, you have the baseline required to create an effective budget plan.
Before you draft a budget plan, write down your operating costs, rental expenses, salaries, telephone/internet tariffs, monthly revenue margin, taxes, IT expenses, marketing budget, and insurance.
Creating a budget keeps professional services on track, helps them make informed decisions, and pinpoints areas for improvement. Implementing the right systems and efficient processes can help you streamline budget planning and keep it from becoming labor-intensive and time-consuming.
3. Keep Track of Day-to-Day Costs
Managing day-to-day expenses, purchase orders, and customer invoices can overwhelm any professional services firm. Still, it is vital to record all your day-to-day business revenue and expenses to stay organized.
Therefore, professional services firms should invest in intelligent finance and professional service automation tools that automate the financial process, from receipts to reimbursement, eliminating manual errors and saving countless hours. Plus, regular tracking of expenses gives you clear insights into the most up-to-date financial data, which you can use to analyze the state of your business and identify bottlenecks to plan strategically.
Tracking day-to-day expenses can also help you:
- Keep your budget intact
- Prevent impulse spending
- Streamline financial productivity
- Claim tax deductions
4. Track and Manage Cash Flow
“One of the main causes of business failure is poor cash flow management” – Susan Rohac, Vice President, Cleantech Practice at BDC
Tracking cash flow helps businesses identify profitable revenue streams or areas where cash is in deficit and provides timely updates on where and when money moves within accounts. By keeping track of cash flow, you can avoid financial shortages and revenue gaps.
Here are some other reasons why cash flow is important:
- It gives you a clear insight into your spending activity beyond what’s presented on your profit and loss statement.
- A positive cash flow allows you to repay loans and pay suppliers, resulting in better professional relationships.
- The cash flow statement provides a detailed view of your business’s cash reserves, which makes financial projections and decision-making easier.
How to Successfully Manage Your Cash Flow
To track your cash flow, you must first collate your company’s financial information and transaction history.
Then, be sure to do the following:
- Keep track of your payables and receivables
- Get inventory off the shelf
- Figure out ways to cut costs
- Maintain comprehensive financial records
- Schedule your payments effectively
5. Document All Your Income Sources
Regardless of your business type, it is critical to document all your income and manage budgets effectively. Budgeting can prevent costly mistakes and ensure successful project completion. Intelligent budget management can help prevent a significant share of cash flow from being consumed by turnover time, idle time, and wasted resources.
Furthermore, with multiple projects running simultaneously, it can be difficult to identify which project is wasting the most resources and cost unless you document income from each. Without this visibility, you may experience billing errors, incorrect statements of work, and misquotes, causing lost revenue or overruns.
In order to stay on top of your financial obligations, you must keep your revenue and expenses accurate and up-to-date. Ensure all business income and expenditures are supported by detailed records, such as receipts, invoices, purchase orders, and payments in and out.
In summary, documenting income and expenses is important because:
- Keeping accurate records can save you from penalties and help you file tax returns on time
- Maintaining accurate financial records will help you determine your budget and cash flow requirements
6. Create a Balance Sheet
A balance sheet is essential for managing your finances effectively. Building a balance sheet is an important practice that gives a snapshot of your company’s financial health by detailing your assets, current liabilities, and shareholders’ equity.
A balance sheet outlines your business’s true worth, helping you make more informed financial decisions. Plus, a balance sheet will help track your capital, giving you a future cash flow projection. A balance sheet can also help investors and stakeholders determine how their business’s assets and liabilities are matched and how they generate returns.
7. Secure a Business Line of Credit
A line of credit is a flexible loan that businesses can obtain from banks or financial institutions. A business can access a line of credit to cover unforeseen expenses and repay them over time. Obtaining a line of credit or small-term financing is an efficient way to manage your finances and ultimately grow your business.
A line of credit can help professional services firms manage short-term funding requirements, such as inventory maintenance, utility bills, salary payments, and new orders. Additionally, a line of credit can help you stay on top of your cash flow throughout the year.
8. Streamline Your Inventory Expenses
Inventory is a critical factor in determining the financial position and profitability of any business, regardless of industry or size. Managing stock and achieving an optimal inventory balance requires a good understanding of inventories. Therefore, identifying your inventory needs is crucial to deciding whether investing in them is worthwhile. Nearly 1 in 5 U.S. businesses fail due to poorly managed inventory and stocking issues. As inventory investments directly affect a company’s profit and cash flow, it is vital to manage them efficiently.
Without effective inventory management, running a business can feel like riding a roller coaster that is about to derail. Improper inventory management can also adversely affect financial statements, such as income statements, balance sheets and statements of retained earnings.
9. Allocate a Portion of Revenue Toward Investment
Investments can create a second source of income, fund retirement or prevent a financial crisis. Above all, investing increases your wealth — it enables you to reach financial goals and gradually improves your purchasing power. Investments can increase your savings and give you extra income that can be put toward necessities. Making sound investments is a crucial financial measure for keeping your business successful in the long run. When you invest a portion of your revenue, you prepare yourself to face any financial challenge.
10. Automate Your Finances
From chasing payments to sending recurring invoices – manually handling all financial operations can be tedious and error-prone. Seventy-three percent of finance leaders believe that automating financial operations improves efficiency and gives staff more time for value-added tasks. For a business to remain viable, it must ensure the integrity of its financial reports, manage its cash flow, and accomplish other basic financial functions. Therefore, it makes sense for organizations to automate these day-to-day financial operations. Automating financial practices allows organizations to maximize efficiency, accuracy, timelines, and regulatory compliance.
11. Keep Tabs on Cash Flow Projections
Cash flow is vital for any business. Having a clear understanding of your cash flow allows you to make smart decisions and avoid a cash crunch. Projecting cash flow can help you decide whether or not to spend, save, or invest in your business every month.
Cash flow projection helps you spot cash gaps in advance and gives you time to determine the course of action to redress the shortage. With cash projections, you can make informed decisions such as cutting down on operational costs, delaying expensive equipment upgrades, or changing customer payment terms.
12. Get a Grip on Tax Liabilities
Tax liabilities are a part of any business, from employee compensation to succession planning and asset protection. Most successful businesses track their expenses month over month and develop strategies to effectively manage their taxes. Tax implications can significantly impact your business’s success and growth. Hence, it is vital to plan your taxes and comply with government tax rules and regulations to increase your tax savings.
It’s time for CFOs to rethink the role tax plays in business decision-making. By integrating tax and financial systems across each transaction, organizations can stay ahead of risks, optimize tax functions, and increase profits.
13. Minimize Your Expenses
In business, profitability matters above all. In an uncertain economy, even a slight increase in expenses can have a huge impact on the profitability of a business. It may not be easy to cut expenses, but as a business, you should always look for cost-saving opportunities and set aside sufficient emergency funds to weather any temporary hardship. However, it’s important to ensure that any cost-cutting efforts do not result in a reduction in the quality of your services since that would adversely affect your business’s success.
These are some proven ways your professional services firm can cut costs:
- Limit your marketing expenses
- Reconsider your bulk purchases on office supplies
- Analyze recurring costs
- Go paperless and save stationery expenses
14. Maintain an Emergency Fund
Inevitably, unforeseen circumstances will pop up out of nowhere and drain your bank account. Perhaps an employee suffers from a long-term illness, or the company’s vehicle breaks down, and you are not prepared, mentally or financially.
If you encounter an unexpected expense or income loss, how will you handle it?
Therefore, it is important to set aside some funds in case of a mishap. Stowing away just US$1,000 can help you create a safety net. Maintaining a cash reserve for emergency expenses can help you manage cash flow in times of economic uncertainty.
Create short-term savings goals and start saving every week or month. Having emergency funds can help you overcome difficult times.
15. Cover Your Risks and Liabilities
Identifying and mitigating risks for a professional services firm can be intimidating. Professional services firms face a myriad of challenges when it comes to mitigating risks. It is impossible to address all potential risks that could affect your business. But, you can mitigate the risks by creating safeguards like cybersecurity insurance and a crisis communications plan.
- Ensure that your business and workforce have the right health insurance and worker’s compensation coverage
- Establish protocols to monitor risk levels at all times, identify new risks and changes to existing risk factors, and modify action plans accordingly.
- Plan for cash flow contingencies in case of a disaster or the death of a key employee
- Ensure your business is protected from lawsuits by consulting with legal counsel
Managing finances can be challenging for any business. Many professional services firms fail to adequately manage their finances due to a lack of financial planning. But, by taking advantage of the tips outlined in this article and implementing a smart PSA tool like Polaris PSA, professional services firms can stay on top of their finances.
Polaris PSA software helps professional service firms gain real-time insights into their finances, optimize financial processes, and streamline billing to win more bids and grow revenue. Having the right tools enables professional service firms to get the most out of their resources, attain their goals, gain a competitive advantage, and accelerate their financial growth.