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A Consultants Guide to Profitability Part 3: Effective Daily Rates (EDR) and Cash Flow Cycle


Project Number: na
International Organisation: European Union
Contracting Agency: Navigator Consulting Group
Programme: Navigator Operations
Operation Date: 01/09/1995 — 01/07/2012
Budget:
Lead Contractor: Navigator Consulting Group
Additional Contractors:
Country: United Kingdom, France, Greece, Cyprus, Ukraine, Russia, etc.
Download project report: a_consultant’s_guide_to_profit_part_3.pdf
Website: Visit Website

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Project Description

 

Download Part 3 in PDF here

 

In Part 3, we reflect on the general financial set-up of the consulting profession, and of portfolios of consultancy projects. This ties together the cost accounting and billing principles we covered in Parts 1 and 2, and raises some important questions about the sustainability of the consultancy profession, particularly as it is practised in donor-funded projects or “technical assistance” consulting.


Specific Project Results or Intellectual Property Created

 

Download Part 3 in PDF here

 

A long time ago, I read Womack & Jone’s Lean Thinking, and a little while later James Collins’ Good to Great. These two books focus on what performance and excellence actually mean in practise, and the role strategic benchmarking plays in creating and sustaining world-class companies. These are still excellent books today, and if you haven’t read them, I strongly recommend doing so.

These got me thinking about the consulting sector, and why it seemed so difficult to do brilliant consulting work and earn a decent living at the same time, particularly within the donor-funded project universe.

My thought process at the time was trying to solve two basic questions that our company had confronted since our foundation in 1995 (about 5-6 years before I read these books):

  • Why did we always seem to be out of money even though we had lots of projects?
  • What types of daily rates should we be charging, and how many should we be charging, in order to avoid the cash flow problem and also attract and retain the talent we needed to grow?

Trying to solve these two questions led me to define a very simple metric for measuring the success of our consultancy operations: the Effective Daily Rate / Cash Flow Cycle analysis. In order to run this, you need three core metrics:

  • Your corporate (or individual) break-even rate, which we calculated in Part 2
  • Your cash flow cycle per project, which we introduced in Part 1, and re-calculate here
  • Your Effective Daily Rate (EDR) as opposed to your Invoiced Daily Rate (IDR)

Sectoral Keywords

  • Profitability Analysis
  • Cash Flow Cycles

Functional Keywords

  • Profitability Analysis
  • Cash Flow Cycles

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