Let’s do it for the cash flow
Cash is king they say. What a load of rubbish.
I started this piece 3 years ago; that should earn me a seat on the board of procrastinators, but then again it would be a rather large board. So 3 years ago… What was I doing 3 years ago?
Yes, I had been running a product cum consulting firm for 6 years with my fantastic partner and friend, Shola or Shola Paystack as some call him.
After 6 years we were both getting tired of the consulting-product-consulting circle, albeit from different perspectives. Me? I was getting tired of taking on certain jobs just to meet payroll and keep the lights on.
Side note: it is a horrible thing to run a product and consulting firm, horrible idea. if you are doing it, stop. The only way it works is if your consulting service is centred around the product.But I can’t get into the details now, I am writing about something else.
I do love consulting, I love analysing business processes, and recommending opportunities for cost savings using technology. I love the meetings, and the charts, and the lunches spent talking about business frameworks. However, I do not love the fact that for all the intelligence God has blessed me with, I could never tell how much profit I made from any particular client engagement.
And it didn’t seem right. In my head, without profit, then any growth you experience is not really sustainable. You have to be deliberate about the margins you want to earn on each service if you really want to grow your firm.
I realised recently, most creative consultant types (legal, technology, marketing, architecture) are not wired this way. For as long as income can cover expenses and leave enough to share amongst partners, they are fine. And I have seen this on different levels — from the guy charging ₦500k to the guys charging ₦20m. I still see it, and each time, I end up being amazed and then worried.
I once read a book, and it said (and I agree) that there is a HUGE difference between
Profit = Income — Expense
and
Expense = Income — Profit
Mathematically, both are exactly the same. Psychologically, they each represent something different. The first one, is the one we all know, profit is simply income minus expense. But there is a big problem with that statement — profit is an afterthought! it is something you arrive at after you have earned money and spent money.
Now take a look at the second one, Expense is Income minus Profit. Expense is the after thought, and you are now thinking of profit first. Which makes a whole lot of difference in how you treat profit.
So rather than expense being something that can keep growing as long as it doesn’t overtake income, expense becomes something that has already been predetermined by virtue of fixing a profit. Because believe me, expenses will always rise to meet revenue (Parkinson’s Law)
I would even go on to say, the difference between these 2 equations is why many people find it difficult to save, and also why many businesses don’t grow. It is impossible to save if savings is an after thought, and it is also impossible to grow any business if profit is an after thought.
You will discover very quickly that those who are successful at saving are those who take out their savings immediately they receive an income. While the rest of us that hope to save whatever we have left after expenses keep struggling.
So why then do we keep going after revenue, when revenue isn’t really what leads to true growth? Of-course revenue is a big part of the growth equation, but it is ultimately useless to increase it if the other part of the equation (cost) will also simply increase. Except of course you are hoping to flip it over to someone else someday, who then has to worry about making sense of the business.
But wait, there is a worse reality. And it is taking in revenue without having a clue about the true cost. And this is the reality of most entrepreneurs who offer specialised services. Of course with time, we gain more experience and we begin to know instinctively what a particular service is going to cost for a particular size of client; what fee to charge for said service, and at what fee to walk away.
But we hardly ever walk away. Without knowing the true cost, it is difficult (and seems almost reckless) to walk away. And unfortunately for you, most clients are actually adept at walking the thin line between an obviously bad proposition and a may-be-okay proposition. They call it negotiation. And many times you leave that negotiation feeling “this isn’t a very good deal”, but it’s a lot of money and you tell yourself “we need to do this for the cash flow”.
I realised there is a huge difference between “I feel this is going to be a bad deal” and “this is a bad deal”. You see, the former is intuition and it can be argued with. The latter is a fact and it is what happens in retail. I ran a retail store with my mum when I was much younger, and you always knew upfront when some arrangement with a distributor was a bad deal because the cost was real, you crunched the numbers and gbam! bad deal. It’s a little wonder we grew to 3 stores in no time.
In consulting however, the cost isn’t very real (it is just “time”, like someone once told me), and worse still, you do not even know this cost upfront. So the best you can really do is to “feel”, you can’t really “know”.
There are few things worse in business than a bad deal, and one of those things is not knowing how bad. If you don’t know exactly how bad, you aren’t forced to learn; and if you don’t learn, you are condemned to the same error one more time. And so it goes… and you end up having fantastic engagements with great clients but you’re still struggling to grow.
So 3 years ago, I sat there looking at my friend as we were about to take on one more project and I thought to myself, we can’t keep doing this. I said to myself, if there was ever an opportunity to fix this problem, I would jump at it and give other entrepreneurs a better chance at growing their consulting firms.
That opportunity came along last year, and I am so happy with how far we have come along. Now I am able to know for certain when the cost of providing a service is beginning to exceed a predetermined budget. I can even tell, well ahead, if a project we are running will exceed it’s budgeted cost, and by how much approximately. I now know for certain that certain services we offer aren’t as profitable as I thought; custom enterprise development may be high revenue, but e-commerce advisory offer us way better margins and opportunities for growth.
I visited a client (who signed up to try out the solution few months ago) recently, and he showed me his dashboard which tells him — that even with revenues of hundreds of millions, he and his team of 20+ have only realized 16% of their earning potential (technical term — realization rate). With 84% of client engagements falling below their target profit margin of 35%. That’s just awesome!
Dear entrepreneurs meet Seegad. Seegad meet world.
