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than warranted by the difficulty of the task. Furthermore, the cost of time (hour, day) of each category should be calculated (which includes a decision on whether to include and how to allocate the overhead cost).2

33.3 Bookkeeping and accounting

Like any business, a consulting organization needs bookkeeping and accounting to control the financial side of the operation and produce information required by law. This section gives some comments on accounting problems faced by consultants but is not meant as a complete review of accounting in professional firms. Such information is available from specialized publications.

Choosing your system

The accounting system used should be an effective management tool, fully adapted to the nature of consulting operations. It should be as simple as possible. A single practitioner who serves a few clients and has a limited range of expenditure can use a very simple system indeed. The complexity of the system will increase with the growth of the firm and the complexity of its operations, but even a large consulting firm should try to keep its accounting simple.

A consultant who is versed in accounting can decide personally what system to use. There are standardized proprietary bookkeeping systems and computer programs for small businesses and professional service firms; the consultant may be able to purchase such a system, including all forms and books, from a supplier of office equipment, software and stationery. In some countries, the associations of professional firms have issued accounting guidelines and recommendations for their member firms. An alternative is to ask an accountant to design a tailor-made system. Bookkeeping and accounting are also well suited to outsourcing and many consultants choose this solution.

The essential criteria to be considered include the following:

●What is the structure of the firm’s income (volume, number of clients, frequency of payments, collection problems, different kinds of income)?

●What is the structure of the firm’s expenses (different expense items, critical expense items, frequency of expenses)?

●What are the firm’s material and financial resources (buildings, equipment, stocks of materials and spare parts, financial reserves, cash)?

●How is the firm’s operation financed?

●What are the existing and potential problems as regards cash flow and liquidity?

●What information is critical for sound financial management and how frequently should it be provided?

●What records and reports are mandatory?

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A small consulting firm may be satisfied with a simple single-entry system, using a cash book, though most consulting firms prefer a double-entry system. Every consultant, irrespective of the legal form of the business and the accounting system chosen, should separate his or her business accounts from private household accounts. This basic rule of financial management is generally recommended by management consultants to their small-business clients, and consultants will be well advised to follow the same principle in their own businesses.

Another possible choice may be between cash-basis accounting (only cash transactions are recorded) and accrual-basis accounting (accounts receivable and accounts payable are recorded). In the United States, for example, professional firms prefer cash-basis accounting since under this system only income for which cash has actually been collected is taxed.

What accounts to keep

In some countries there will be a suggested or even compulsory chart of accounts (called “accounting plan” in some countries) that both public and private companies have to use. In many cases, however, the consultant will be free to choose his or her own chart of accounts. In particular, he or she will be able to decide how detailed the chart should be.

The purpose has always to be kept in mind. Accounts from which statutory financial reports are produced will be needed. Accounts required for controlling important expenses (e.g. wages of administrative and support staff) should be kept separately in most cases. On the other hand, unimportant expense items do not require separate accounts, and a number of these items can usually be blocked in one account.

It is advisable to aim at coherence between budgeting and accounting to facilitate both the preparation and the control of budgets. If the firm decides to structure its operating budget as shown in table 33.1, its accounts for income and expenses should be structured accordingly. The accounting can be more detailed. For example, income may be recorded in several client accounts before being posted to the general ledger. However, inconsistencies should be avoided. Thus, if “marketing and promotion expenses other than salaries” are budgeted separately from salaries, they should be shown in the same way in the respective accounts. To avoid errors and confusion, it is necessary to be precise in defining what is to be recorded in what account. For example, will all telephone charges (except those chargeable to clients) be consistently charged to the communications account, or should the ones related to marketing be treated as marketing and promotion expenses? Many such decisions will have to be made.

Financial statements

In most countries, consulting firms established as corporations have to produce financial statements that include:

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–the balance sheet;

–the income statement (profit and loss account);

–the statement of sources and uses of funds (funds flow statement);

–the statement of earned surplus;

–the auditor’s certificate and notes on the financial statements.

The meaning and use of these statements are amply described in accounting and financial management literature.

Even if not required by law, all consulting firms, including sole practitioners, should prepare financial reports at least once a year, for self-assessment and to monitor the financial health of the firm. This can be quite a simple, though extremely useful and instructive, exercise.

1Fifteen years ago AMCF started collecting data from consulting firms of various sizes and technical profiles, on a strictly confidential basis. Using the profit model for professional firms, AMCF issues annual surveys, giving key indicators for the previous year and longer-term trends in overall performance. See AMCF: The operating ratios for management consulting firms: A resource for benchmarking (New York, AMCF, 2000).

2See also D. Maister: “Measuring engagement profitability”, in American Lawyer (New York), July/Aug. 1994; and idem.: “Managing your clients’ projects”, in True professionalism (New York, The Free Press, 1997).

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