Primer for Financial Management of Small Consulting Firms

Abstract

Financial management for new principals and founders of small firms is introduced. Many small firms fail, or are not profitable due to principals not understanding the basics of financial management. Project accounting is often rudimentary and no tracking of project budgets takes place. The concept of accrual accounting is introduced. Income is recognized when invoiced and unbilled work in progress is tracked. Expenses are incurred when bills are received, presenting a truer picture of profit and loss. Adequate cash for operations requires a budget and comparisons of unbilled work in process and tracking of billings and collection of accounts receivable. Also introduced are the basics of ratio analysis for computation of overhead, billing ratio, and other key factors that allow comparison with other firms. The importance of using an outside accountant is also included.