Running a financial model consulting agency is not an easy task. On top of that, making sure that your costs and profitability are in order is another issue. This guide will help ensure that you get all the know-how about calculating costs and profits for your consultant agency through financial model consulting.
Many times, you will find that a service agency can jump scales faster than others. For instance, you might find yourself operating a large-scale agency in no time. When does this happen? Well, if you are offering competent and efficient services, then more people will tilt towards you.
The show of skill will lead to more and more business for your agency, therefore, leading to troubles in management. To combat this, you will need more employees to handle more clients. Thus, leading to ever-growing costs and opportunities to work on your profitability.
One thing that you will need to ensure is to keep a measure of your profits and costs as you operate. For this, you need a streamlined system in place to get you through. Here, you will find all you need to measure your profitability and costs and understand why you require financial data model consulting.
Financial Model Consulting: Profitability Benchmarks
Before getting into the guideline of tracking your progress, you should know some basic benchmarks to follow. These include profitability ratios that will help you assess how much revenue you are retaining after paying off your expenses. The two variations include the net profit (EBITDA) and the gross profit margin.
The net profit, commonly referred to as the EBITDA (Earnings before interest, tax, depreciation, amortization), is the ultimate benchmark. It shows you how much of your revenue remains once you make adequate deductions from it.
The calculations will remove almost every overhead, but ensure that the interest, tax, depreciation, and amortization aren’t deducted. This is mostly because these calculations tend to be detailed and a bit confusing. Your financial model consulting agency can help you with this.
Gross Profit Margin
Now, let’s move on to the gross profit margin. This is different from what the net profit as it does not account for operating costs. Instead, this measures the profitability after deducting expenses that are directly attributable to the revenue generation.
After you deduct your COGS from the revenue, you end up with the gross profit. Your consulting firm financial model will incorporate these calculations. Whether you’re looking at the current year or the forecasts, your income statement will showcase your gross profit.
The gross margin is calculated as a percentage of your sales and is a common profit measurement tool. It is best to have a financial data model consulting business to guide you through this.
Financial Model Consulting: The Ideal Proportion For Profitability Benchmarks
Now, when it comes to the ideal proportion of benchmarks, things aren’t always crystal clear. This is mainly because the profitability varies depending on the industry you are operating in.
For instance, running a consulting agency with full-time employees will increase your overheads. This will leave room for higher gross profit margins. However, if you are operating on a different scale where you hire more freelance workers, then your gross margin goes down. The opposite holds when we consider net profits.
You want to ensure that you’re meeting the minimal profitability for the industry you operate in. The best way to go about this is by having a financial data model consulting agency to help you guide through the entire process. With professionals on board, you will feel more at ease. Your consulting firm financial model is bound to be more accurate as you will have experienced people working on it.
Calculation Of Costs And Profitability
Here, you will understand how to do all the basic calculations of costs and margins. It may sound simple as we will break it down in a way for you to understand. However, you should know that making all the calculations is not that simple.
We always suggest getting a financial model consulting service on board so that your data and margins are accurately represented. So, before any further ado, let’s get into the cost details.
Step 1: Getting Into The Details Of Billable Employees Costs
The first thing that many consulting agencies get wrong is calculating the cost of their employees. It may seem like a simple task, but it is often miscalculated. This is why you need to ensure that you’re aware of what billable employee means.
Billable employees refer to all of those employees working with clients that will pay your agency. Now, the cost of such employees would include all the hours they have worked and their annual availability.
For instance, your employees’ cost per hour will include their salaries, benefits, insurance, and all other relevant items divided by the capacity. While your employee salaries will be consistent, the additional cost (benefits, insurance, etc.) should not be more than 25 to 30 percent of your salary.
Moving on, you will have to calculate how much a person can work in a year. This multiplied by the cost-per-hour of your billable employees will give you the ideal cost idea. It will also make the salaries portion of your consulting firm financial model easier to create.
The general rule states a 40-hours working week. So, according to this, you can make the relevant calculations about your employees’ annual costs that you will incur.
Step 2: Calculations Of Cost Of Goods Sold, Adjusted Gross Income, And Gross Margin
The next thing that you have to focus on is the adjusted gross income, and all the relevant calculations attached to it. Initially, you will take your gross revenue and deduct all the directly attributable expenses from this. So, you’ll be looking at the cost of goods sold.
When you work your way into calculating your cost of goods sold, you will have to consider various things. It will include any travel expenses made that are proportionate to the production. Moreover, you will also have to consider any work outsourced, use of rentals, and other costs directly related to production or service.
The main thing that comes under your COGS is direct labor. You can easily assess this by measuring the hours worked and multiplying that with the cost-per-hour.
The last bit that will be required on your end is the gross margins. Now, you have all your costs and revenues separated by now. Once you deduct your labor costs from your AGI, you end up with the gross margin in your consulting firm financial model.
Financial Model Consulting: What Else Can You Do?
Once you have your gross margins and adjusted gross income, you can proceed with the next steps. This is where you’ll be able to calculate your average billable rate (ABR) and the net profit.
You have to be mindful that these steps can only be completed once you have the previous things in place. Mostly because these are in continuation of them. If you’re not clear on how to go about the previous steps, then you need a Chief Financial Officer that can help you with financial model consulting.
Use The Average Billable Rate
The first thing you can easily do once you have your AGI is to calculate the ABR. This is easy to calculate as you don’t need to get more data for this. All you have to do is use the AGI and divide it by the capacity used in terms of hours.
This is an effective tool when it comes to analyzing your consulting firm financial model. But sometimes, you do not have the right people on board to help you understand the details of such metrics. What you can do is hire a financial data model consulting service that can aid you in this regard.
Calculate The Net Profit
Moving forward, you can easily calculate the net profit once you have your gross profit. What you will need to do is deduct all the possible operating costs from here. This is simpler than calculating the COGS as you take a look at the overall expenses that occur at your consultant agency.
So, what type of costs should you consider? Well, let’s take a look at a small list of potential expenses that you can incur. However, your agency’s operating costs will not be limited to these only.
- Administration staff expense
- Rent and utility expense
- Selling expense
- Insurance expense
- Legal fees
- Website hosting fee
You’ll find more recurring expenses in your agency. This depends on the work that you’ve done. If you’re looking for a way to minimize your costs, then you can easily get a financial data model consulting agency on board to help you with this.
Moreover, you can also convert your overall overheads into a per-hour basis by diving the amount by the capacity that you calculated earlier. Now, you can multiply this by the number of billable hours, and you will get the net margin in respect of your client.
The Importance Of Measuring Profitability
Creating, measuring, and assessing your profitability plays a vital role in your business growth. The majority of the agencies have financial data model consulting service providers to help them out in this aspect. It’s essential to make sure that you’re calculating your revenue and profitability for effective decision-making.
The more accurately you measure these two, the easier it will be to forecast your profits and revenues. This eventually helps in managing your risks better as you have a better idea about the costs that you will incur.
Financial Model Consulting: Final Words
Your business profitability is highly important, so you must make sure that you are accurately calculating it. It will inevitably aid in creating your consulting firm financial model that you can make use of for planning purposes.
We suggest that you should hire a financial model consulting service to ensure the efficiency of all the calculations. You will find this highly beneficial for your agency as you will be able to make better and more expert financial decisions.
We, at Oak Business Consultants, offer our clients financial data model consulting services. We aim to meet all of your financial requirements. Take a look at how our CFO service can help you with this highly technical and critical success factor.
Our services come with vast experience. Head on to our website, at Oak Business Consultants, and get a free consultation!