Is it possible to mix the invoicing principle with the production principle? Yes. As a matter of fact, it makes excellent sense for consultancy firms.
The consultants of a consultancy firm are the engines that keep the business running – and as such, the very core of the firm’s activities and earnings. That’s why all consultancy firms dream of employing consultants capable of invoicing all billable hours at the maximum hourly rate. In real life, however, this is rarely the case.
To achieve an impressive turnover, consultants and management alike need to stay up to date on the amount of value generated by the firm’s employees every hour, and whether the hourly value is at risk from overrun.
For most consultancy firms, the consultants are free to prioritise their work and, to some extent, delivery. Consequently, granting consultants access to their own key figures can be of monumental significance in achieving results. The sequence of jobs, for instance, can affect turnover significantly, just as delivery impacts the hourly rate.
Focusing on ongoing communication
So why are only a minority of consultancy firms using a structured and ongoing means of communication to present generated values and contribution margins to their consultants?
The answer is simple: collecting and presenting data on projects, finances and value generation before they’re in the system, and before the project is finished, is a time-consuming, expensive and complex process.
Financial management in small to medium-sized consultancy firms is often based on three principles:
- Turnover = invoiced value. In accounting, a saying goes that a company is run according to the invoicing principle.
- Bonuses are calculated when projects are finished.
- Value-based momentum on current projects is defined once a year in connection with the annual report, with turnover being based on invoiced values.
This model is simple for financial controllers, but often useless as a day-to-day tool for management and employees alike. It’s simply too unrefined and slow.
In other words, the financial system is best suited to the invoicing principle (the least time-consuming one), whereas the company is better off being managed according to the production principle, in which turnover on projects and for consultants is not defined by when invoicing is carried out, but when the work is put in.
Mixing the invoicing and production principles
So why not think outside the box and mix the principles? Run your financial system after the invoicing principle, and your company after the production principle. Several of our customers have benefited from this model, in which ongoing reporting on finished work is based on the production principle using figures retrieved from TimeLog Project.
To some accountants, this seems a ludicrous idea. After all, it will unbalance the system’s turnover, communicated externally, as well as the time registration and project management system, communicated internally. This drawback is offset, however, by each project manager, consultant and manager having constant access to the latest value generation figures from updated time registrations, regardless of whether your project is based on
- fixed-price contracts, and the budget is overrun
- a multiple-case contract, on which the allotted hours have been spent
- a time and material contract, for which you know the customer is inclined not to pay.
As regards the spread between generated value and invoiced value, this is simply ongoing work, which is available for the auditor at financial year’s end.
It couldn’t be simpler.