- The majority of a consulting firm's costs
are labor and support functions.
Expenses like salaries, commissions, and license fees
are major costs.
Do some benchmarking on salaries
for the level and skill of people you need.
Decide if you're going to pay at, above,
or below market rates.
Don't forget to include the costs of benefits, vacation,
and equipment for your team.
Talk with other consultants about
commission models they use.
There's no shortage of innovative ways to compensate people.
Just be sure the behavior you're paying people for
is the behavior you want.
If you give people a smaller commission
for generating a lead
versus a large commission for closing a sale,
you might find yourself with a lot of low-value leads
because that's an easier way for your people to make money,
rather than doing all the work of closing a complex sale.
Think through your compensation model
really hard before you launch it.
License fees for things like software packages
or third-party content can be steep.
You'll need to either mark that cost up
or be profitable enough to cover it yourself.
Minor costs like travel, equipment, materials,
and professional services like legal, finance, IT, and HR,
can add up quickly and have a big impact
on your profitability.
Travel costs can add up.
Consider loyalty programs because you can get better rates,
and the perks matter if you're traveling extensively.
Equipment and materials add up over time, too.
At first, only buy what you need.
Excessive inventory can be costly,
and it ties up valuable cash.
Shop around for professional services.
Get referrals from other consultants.
Compare the rates for legal, finance, IT, and HR services.
But remember, you get what you pay for.
These are critical support functions.
Consider the cost of a service provider
not giving you high quality work before you go cheap.
Once you understand all your costs,
build a bottoms-up financial forecast
to see how much revenue you need to generate
to cover those costs.
Realize any gap between revenue and costs
can be bridged short term with financing activities.
Ultimately though, you need to be profitable enough
to cover those costs.
Build a good pro forma profit and loss statement
to give you the picture you need
to understand the future financial performance of your firm.