Fractional CFO for Professional Services Firms
Financial leadership for law firms, accounting practices, and consultancies.
Key Takeaways
- •People are both the product and the biggest cost—utilization drives everything
- •Project profitability requires real-time visibility, not month-end surprises
- •Partner economics and compensation require sophisticated financial modeling
- •Cash flow can be volatile with long payment cycles and project timing
Professional services firms—law firms, accounting practices, management consultancies, architecture and engineering firms—have unique financial characteristics that require specialized CFO expertise. Your people are both your product and your largest expense, making financial management fundamentally different from product businesses.
A fractional CFO with professional services experience understands these dynamics and can drive significant value through better utilization, project profitability, and partner economics management.
Utilization: The Core Metric
Utilization—the percentage of available hours billed to clients—is the single most important metric in professional services. Small changes in utilization have outsized impact on profitability.
Utilization Economics
The Calculation
Utilization = Billable Hours / Available Hours
Benchmarks (vary by firm type)
Law firms: 1,800-2,000 billable hours/year (80-90%)
Consulting: 75-85% target utilization
Accounting: Varies seasonally, 65-80% average
Impact
A consultant billing $200/hour with 75% vs. 80% utilization:
Difference of 100 hours × $200 = $20,000/year per consultant
What Drives Utilization
- Demand: Sufficient client work to fill capacity
- Staffing mix: Right ratio of senior to junior staff
- Scoping: Projects properly scoped to deliver efficiently
- Non-billable work: Business development, training, administration minimized
- Write-offs: Time worked but not billed to clients
Tracking Matters
Real-time utilization tracking allows intervention before month-end. A CFO who establishes weekly utilization dashboards can identify problems while there's still time to adjust staffing or accelerate business development.
Project Profitability
Understanding profitability at the project level is essential. Firm-level profitability can mask unprofitable projects or clients that drain resources.
Project Profitability Metrics
- • Revenue vs. budget
- • Hours worked vs. estimated
- • Realization rate
- • Effective hourly rate
- • Margin by project type
Common Problem Areas
- • Scope creep without billing
- • Fixed-fee overruns
- • Senior staff on junior tasks
- • Write-offs at billing time
- • Repeat problem clients
Realization: Billing What You've Earned
Realization Rate Calculation
Realization = Actual Revenue / (Hours × Standard Rate)
A consultant with a $200 standard rate works 100 hours but bills $15,000:
Realization = $15,000 / ($200 × 100) = 75%
25% of the value was written off or discounted
Partner Economics and Compensation
In partnership structures, financial management extends to partner compensation, capital requirements, and distribution timing—complex issues that require sophisticated modeling.
- Compensation models: Eat-what-you-kill vs. lockstep vs. hybrid approaches
- Capital requirements: Partner buy-in and capital account management
- Distribution timing: Quarterly draws vs. year-end distributions
- Origination credit: How new business is credited and compensated
- Tax planning: Pass-through entity taxation and partner tax positions
Compensation Tensions
Partner compensation systems create incentives that can conflict with firm health. Individual billing credit can discourage collaboration; eat-what-you-kill can undervalue firm building. A CFO helps design systems that balance individual and firm interests.
Cash Flow Challenges
Professional services firms often face cash flow challenges despite strong revenues. Long billing cycles, collection challenges, and lumpy project timing create volatility.
Common Cash Flow Issues
- Long collection cycles: 60-90+ day DSO is common in professional services
- Billing lag: Time entry delays mean revenue isn't invoiced promptly
- Project timing: Large project completions create lumpy revenue
- Seasonality: Tax/audit season for accounting; litigation cycles for law
- Partner distributions: Large cash outflows at distribution time
CFO Focus Areas
- Accelerate billing (weekly vs. monthly billing cycles)
- Improve collection processes and follow-up
- Establish credit lines for seasonal needs
- Model cash flow around distribution timing
Key Metrics for Professional Services
A professional services CFO should track and report these metrics regularly.
| Metric | What It Measures | Typical Target |
|---|---|---|
| Utilization Rate | Billable % of available time | 75-85% |
| Realization Rate | Revenue vs. standard billing | 90%+ |
| Revenue per FTE | Productivity measure | Varies by firm type |
| Profit per Partner | Partnership profitability | Industry benchmarks |
| DSO | Collection efficiency | <60 days |
| WIP + AR | Total unbilled + uncollected | <90 days revenue |
Related Resources
Professional Services Firm CFO Support
Eagle Rock CFO understands the unique financial challenges of professional services. Let's discuss your firm's needs.
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