Consulting for Profit & Success
How to Develop a Competitive Financial Proposal
By
Silvester Hwenha
Smashwords Edition
****
Published By
Silvester Hwenha on Smashwords
Consulting for Profit & Success
How to Develop a Competitive Financial Proposal
Copyright 2011 by Silvester Hwenha
Smashwords Edition License Notes
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Other books by Silvester Hwenha available at Smashwords.com
The Making of a Consultant: The Keys to Establishing a Successful Consulting Career
Strategies and Tips for a Writing Winning Technical Proposal
Costing and Budgeting for Consulting Fees
Developing the Project Operations Budget
Determining Project Profitability
Financial Proposal Consolidation and Submission
Introduction
Starting a consulting business is difficult enough but staying in the business is even more challenging. You must find clients, consistently deliver the best services, and charge the most competitive fees for your services. The bottom line is that the business must make a profit to stay afloat and to grow.
Making money in consulting boils down to how skilled you are at developing competitive and profitable financial proposals and project budgets. Most consultants have exceptional technical skills in their area of specialisation but often lack the financial skills necessary to sustain their consulting careers. Money is the lifeblood of any business. Without a healthy cash flow your consulting practice will inevitably grind to a halt.
This book provides you with knowledge and specific financial skills, hints and tips necessary to help you develop a competitive financial proposal. After reading this book you will:
Clearly understand the steps involved in developing a financial proposal;
Have the ability to evaluate your services and charge competitive fees;
Confidently develop project budgets;
Have the ability to determine the profitability of consulting projects; and
Create healthy professional relationships with associate consultants.
About the Financial Proposal
In development consulting in order to get work both the technical and financial proposals must pass the client’s tender evaluation process. This book focuses on the financial proposal. The financial proposal complements the technical proposal to constitute a full proposal. In fact, the financial proposal is based on costing the technical proposal. Generally, the financial proposal consists of two key sections; consulting fees and project operational costs. The consulting fees are what the individual consultants involved in the project are paid in exchange for specific services over a specified duration. Project operational costs indicate what it would cost the client to finance the project to completion.
While the above constitutes a complete and acceptable financial proposal, it often suffices only for small and short-term projects. For larger, more complex and long-term projects clients require a more detailed proposal. In addition to the above, the consultant or consulting firm is required to provide a detailed narrative of the financial management systems in place that demonstrate to the client adequate capacity to manage and control financial resources.
Costing and Budgeting for Consulting Fees
Consulting fees relate to the money paid to a consultant in exchange for specific services at a stipulated rate over a specific period of time. In development consulting the fees are commonly charged per working day.
How to set your consulting fee rate
One basic rule about costing your services is that you must know the value of your services. Do not let clients determine what you are worth. Always make sure you negotiate for fair compensation for your services. Make the effort to research and be aware of the standards regarding professional fee structures in your particular area of consulting. Most organizations have guidelines and structures for professional fees. Most such structures peg consulting fees based on the qualifications and years of experience of the consultant. Resist the urge to be greedy and opportunistic; always comply with industry standards when pricing your services. Remember that clients are buying your expertise. Therefore, once you have set your rate allow yourself to gain a track record of successfully implementing projects before increasing your rate. Your experience will enable you to easily negotiate for higher and favourable fees.
While you need to charge a consistent consulting fee rate, it is also necessary to be flexible. Your rate should have some allowance for negotiating with clients who might need your services but do not have a sufficient budget to cover your fees. Sometimes the work might add value to your portfolio of services and prepare you for other bigger projects. Use your discretion but do not be shy to turn away loss making projects unless if it is part of your social responsibility plan.
Determining your consulting fee and negotiating with clients is a tough process and sometimes consultants price themselves out of business. This could happen in one of two ways. First, some consultants peg their fees above the market rate in an effort to increase profits from projects. The cardinal rule in consulting is that never come out to the client as greedy or desperate for money, even if you are! Outright greed and desperation will raise red flags and scare the client away. Second, some consultants accept very low fees and barely get by in the hope that this will secure them repeat business in future. Sometimes this helps consultants to get into the industry but it does not always work in the long-term. Remember though that when proposals are evaluated it is not necessarily the cheapest proposal that will be selected. Furthermore, once you price yourself below the market rate, it will be very difficult to justify huge increases in your fees in future. So make sure that you charge competitive fees that will make you profit and keep you in business.
How to develop a consulting fees budget
When you are an independent consultant developing a budget for your fees is simple and straight forward. When associate consultants are involved the budget for consulting fees must be disaggregated to show the fees paid out to each consultant and the number of days worked. In the budget the consultants can be identified by name or by their roles in the team. The fees must also be disaggregated by phase or activity for clarity. Clients always want to know what they are paying for.
Where field work is conducted as part of implementing the project, fees for other personnel such as research assistants and data entry clerks must also be charged separately. Remember that any activity not costed will reduce your profit margin as the activity will still need to be conducted to fulfil the assignment.
Most clients will provide you with their preferred structure for the budget. However, where no format is suggested develop a simple and clear but detailed costing structure. The budget must also be presented in the stipulated currency. An example for a consulting fees budget is shown below.
Developing the Project Operations Budget
Project operational costs relate to those costs incurred during the course of implementing and managing the project. These costs are derived from costing all the activities to be undertaken to complete the project as outlined in the work plan. It is therefore important to make sure that the work plan is comprehensive and detailed to ensure that all the activities are costed. Generally, operational costs are direct and reimbursable costs and as such are commonly charged at cost price. Examples include travel, communication (email and phone bills), stationery; printing and photocopying of project documents. These costs are often incurred by the consultant and then reimbursed by the client.
Clients will often indicate allowable costs and it is your responsibility to ensure that the client approves of all expenditure in advance to guarantee reimbursement. In addition, authentic proof of expenditure such as receipts and invoices are required before the client can reimburse such expenditure.
Where the project requires the consultants and other staff such as research assistants to work away from their normal work stations, per diems or daily allowances are paid to cater for out-of-pocket expenses, food and accommodation. These allowances are often paid in advance and require no formal accounting beyond providing accommodation receipts as proof that you actually went on the field trip. Per diem rates are often determined by the client based on the cost of living in a particular geographic region. However, where these allowances are too low to sustain daily living expenses they can be negotiated.
Where field work is involved transport must be costed. Where workshops will be conducted workshop venues and refreshments for participants must all be costed. Great care must be taken to ensure that all operational costs are covered. Poor costing will reduce the profitability of the project on the part of the consultant and clients are often unwilling to renegotiate budgets once they have been agreed on.
Creative costing that minimizes project operation costs is a requisite skill as this often gives your proposal a competitive edge over your competitors. Where possible, suggest cost cutting options to the client. For example:
Use your own vehicles to conduct field work. Even when you charge a fee to cover vehicle servicing costs, it will still be cheaper than paying for a rental car; and
Use your own computers for data entry instead of hiring.
When operational costs are reduced your budget becomes competitive. Low operational costs will not affect the profitability of your budget as these are direct and reimbursable costs. Below is an example of a project operational costs budget.
Value Added Tax (VAT)
All registered consulting firms have tax obligations. As an individual you are also liable for income tax. Income from every project is thus liable for tax. Your budget must indicate whether it is inclusive or exclusive of value added tax (VAT). Most clients in the development sector are non-profit organizations and often will not accept budgets inclusive of VAT. This calls for creative pricing of your work to ensure that your budget remains profitable after tax. In addition to tax, you budget must make provision for all possible contingencies.
Your budget must always have a shelf life or validity period. This is critical in situations where clients delay the hiring process and only do so when some project costs have changed and the budget needs readjustment. Conventional practice shows that financial proposals are valid for a period of 90 days or three (3) months.
Determining Project Profitability
Let us face it; the primary objective of any business is to make money. Consulting is no different. Providing cutting edge services and solutions to clients comes with the job. This does not mean that consultants are not passionate about their work; consulting is business and to remain viable the business must make profit. So do not be shy or reserved when it comes to charging competitive fees for your services.
It is critical to determine the profitability of a project before you decide to take on that project. Since all operational costs are charged at cost price you can only make profit through charging competitive consulting fees. When you work as an independent consultant this is straight forward because you get to retain all the professional fees you charge the client. When associate consultants are involved, determining the profitability of a project becomes a challenge. The challenge arises from the need to balance paying out competitive rates to the associate consultants and retaining a healthy profit margin.
Different consulting firms use different strategies to reward associate consultants fairly and still retain a profitable margin. The most common strategy is to negotiate and agree on the fees for associates, add a ‘mark up’ and bill the client. For example, an associate consultant may agree to a fee rate of $300 per day and the firm bills the client for $400. This means that for every day that the associate consultant is on the project, the firm makes a profit of $100. The profit margin will vary from firm to firm and from consultant to consultant. While there may be no universal guidelines regarding the acceptable profit margin there is certainly a limit beyond which clients are not prepared to pay.
The conventional practice in developing consulting is to develop a budget for professional fees and then separately develop a retention or profitability table (whatever you choose to call it). The retention table basically shows the rate you charge the client for each associate consultant, the actual rate to be paid out to the associate consultant and what you retain as profit (see table below). This table shows that at the stipulated rates the profit margin on the budget would be 16% or $2750.00.
Strategies for retaining associate consultants
Most independent consultants and consulting firms depend on a pool of associate consultants to complement their expertise in implementing consulting projects. Repeatedly doing business with the same associates often improves team performance. It is therefore important to develop strategies to retain associate consultants. Here are a few ideas:
Always agree on competitive fees. Squeezing associate consultants in a bid to raise your own profit margin will not work for long. Chances are the associate consultants will only work with you once and never return. So be fair and benefit more from having a pool of competent and loyal associates;
Create and maintain a healthy professional relationship with the team. Provide adequate back-up support including making travel arrangements, processing advance payments and basically sorting out and managing all logistics to enable them to do their work effectively;
Invite associate consultants to professional events where they can benefit from networking with other consultants; and
Send associate consultants professional literature such as articles, reports and news related to the consulting industry.
When your associates feel valued and are rewarded fairly for their services, they will be loyal. This will serve you the labour of putting together a team every time you want to bid for an assignment.
Financial Management Systems
Financial management systems are critical especially when you land big projects with relatively big budgets. If the client is going to pay large sums of money in advance to cover project costs, they invariably need proof that you have or you can access proper financial accounting and management tools and systems. If such tools and systems are in-house, it presents a distinct advantage although it is also acceptable to tap such skills externally. Usually having a computerised accounting system (such as Pastel) and a qualified Book-keeper or Accountant is enough proof of a functional financial management system. In some cases clients will also require proof that your systems are tax compliant. The following documentation is often requested in to satisfy clients that you have a sound financial management system:
Tax certificate;
Audited accounts; and
Bank statement.
For larger projects and where the firm may be required to pre-finance the project, the client will request proof of funds before awarding the contract. These requirements are often limiting to most emerging small and medium consulting firms. To circumvent such challenges small firms often partner with more established firms who have functional financial management systems and adequate funds to pre-finance projects. In the long-term you should strive to establish your own financial management system and grow your savings from revenue.
Financial Proposal Consolidation and Submission
Since the different sections of the financial proposal are prepared separately, in the end you must consolidate the proposal. All calculations and totals must be verified for accuracy. Once the budget is submitted no corrections to the proposal will be permitted. In order to ensure accuracy in the calculations, insert formulas when you design you budget template. This will make it easy for you to make adjustments to the budget as all totals are then automatically calculated.
Payment Schedule
Once the budget has been finalized, you must develop and propose a payment schedule to the client. Always propose a down payment upon signing the contract. This initial payment must be calculated to cover project expenses including fieldwork up to the submission of the first major deliverable. Without a down payment, most consultants and emerging firms fail to take up and implement projects because of lack of adequate financial resources to pre-finance projects.
However, most clients are reluctant to agree to a down payment and often prefer to make payments against major project deliverables. This then requires the consultant to pre-finance the project. In order to avoid the financial strain imposed by the need to pre-finance projects, you should routinely save a fixed portion of your fees to build your financial reserves.
Submission of the Financial Proposal
The financial proposal in packaged separately from the technical proposal. Where the proposal is submitted electronically, the financial proposal is attached separately. When hard copies are required the financial proposal is packaged in a separate envelop and clearly labelled.
The reason for packaging the technical and financial proposals separately is that they are evaluated separately. The technical proposal is evaluated first. The financial proposal will only be evaluated if the technical proposal reaches or surpasses the minimum threshold set by the client.
Key Takeaways
The financial proposal entails costing the technical proposal and consists of budgets for professional fees and operational costs, and a narrative of your financial management systems;
Charge your professional fees based on your experience and industry standards. Fees that are too high will price you out of business while fees that are too low will bankrupt you;
When you engage associate consultants strike a balance between paying out competitive rates and ensuring a profitable retention;
Project operational costs are direct and reimbursable costs and therefore must be charged at cost price. Ensure that you have receipts and invoices to facilitate reimbursement by the client. Also make sure that the client approves all costs before they are incurred;
Your budget is liable to taxation, so make sure you know how to handle this and and other contingencies to remain profitable;
Invest in developing financial management systems. They are very important when you go for large and more profitable assignments; and
Negotiate a payment schedule that allows for a down payment with your client. This will help you to conduct the assignment without the financial strain of pre-financing projects.
Silvester Hwenha is an independent Development Consultant with over 10 years of experience consulting in the non-profit sector in Southern and East Africa. Silvester has been a Senior Consultant with reputable consulting firms in Zimbabwe and has been engaged with non-profit organizations based in the USA. Silvester is a Zimbabwean national now living in Pretoria, South Africa.
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Email: mailto:hwenha@yahoo.com