Project based professional services firms have no recurring revenue. They survive based on a stream of new projects and off a backlog of projects. For some firms, the Coronavirus has eliminated or diminished the flow of new projects. And, backlog projects may fund salaries for now, but when it runs out, incomes will disappear.
The average backlog for a boutique professional services firm is three months. The outbreak was declared a pandemic on March 13th. This means most firms will struggle to pay salaries around June 13th. If you fail to stretch your cash flow, salaries will disappear this summer.
The scientists estimate the virus will be with us until the summer. Most economists estimate normal business activity won't rebound until Q4. So, you need an extra six months of cash in the bank. Cash cannot run out in June. The balance must make it until December.
How can you stretch cash another six months? The members of Collective 54 suggest a deep dive on project profitability.
What is project profitability?
Project profitability is an analytical exercise designed to make each project more profitable. It highlights and eliminates waste. The result is an increase in free cash flow. When saved, this cash flow converts into higher cash balances. Many firms make the mistake of measuring profitability in the aggregate. By measuring at the project level, hidden opportunities for more profit get revealed.
Implementing project profitability correctly requires more explanation, however, here are the basics to get you started:
- Identify the projects in the backlog to analyze.
- Convert each SOW into a Work Breakdown Structure.
- Eliminate nonessential tasks.
- Re-staff the project, based on reduced workload.
- Shift the project tasks to less expensive junior staff.
- Shift tasks to less expensive outsourced/offshore resources.
- Implement a change order process to charge clients for out of scope work.