Professional service firms are facing challenges from changing expectations, client demands and business models. Meeting those challenges will require investment and firms need to look carefully at how they raise the finance to meet their future needs.
Borrowing - Significant exposure to on demand facilities
Our survey of 90 professional services firms found that many of them are taking a relatively unsophisticated approach to securing funding. In particular, a large number of them were prepared to carry large overdrafts that are ‘due on demand.’ The responses showed that nearly a third of firms are still using overdrafts or short term debt to finance the majority of their borrowing and 9% are borrowing more than 20% of turnover.
CFOs outside the sector would wince at the thought of managing a business in uncertain times with a large creditor that could demand the money back at any time. Using overdrafts in this way creates a real risk that if the business comes under pressure, managing the relationship with their finance provider will become challenging.
It is never enjoyable to plan for worst case scenarios but, in this uncertain business environment, firms do need to be taking steps to develop more resilient financing models. They should also be building strong working relationships with their lenders. Nearly 40% of firms say they do not meet their main lenders regularly and are not sharing management information which would give banks a clearer understanding of the firm’s performance.
All this suggests that firms are not spending enough time thinking about how they should structure their borrowing, what level of borrowing they should have and how they should manage their relationship with their lenders.
Look at ways to free up cash
One of the most surprising findings from our report is that the professional services sector has so much cash tied up in working capital. They have plenty of cash at their disposal and yet continue to borrow to fund their capital needs.
Unlocking these funds has the potential to release significant amounts of cash. While this is not easy and requires careful planning, and often organisational changes, for those that are willing to make it a priority, the benefits are significant. We have seen firms reduce net debt by 20%-25% in less than a year through an organisation-wide commitment to better cash management. That will make a real difference to the business.
Our UK Working Capital Study [ 655 kb ], carried out last year, showed that top performing organisations in all sectors look for ways to optimise working capital and deliver sustainable improvements in cash flows to fuel growth, even in times of uncertainty. Professional services organisations should be doing the same.
Broad range of business models available
It’s clear that no one structure will work for all firms. However, it’s equally clear that some of the long standing myths about how things are done can be challenged, not least as professional services open up to a broader range of business models. By doing so they will reap the benefits and create more effective and resilient financing models.
Download our report, How are firms funding their future strategy? to learn about the approaches that could work for your firm and understand how others are structuring their financing.