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Cash Flow Over Profits — on Why We Gave up on Consultancy

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When we started out in business, the easiest way to get things rolling was to get into consultancy. So we opened up a web design shop, landed our first few clients, and started working on projects. We have done this for the last 3 years, give or take. However, about 2 years ago, it hit us, that while profitable, consultancy was barely scalable. It was time to restructure.

So, how did we do this? And why have we thought about leaving consultancy or at the very least making it a premium service? For starters, the company has become the holding company for any other products or companies we have/will create and/or invest in in the future. We are now focused on becoming a product-based company. Here are the reasons why:

Scaling consultancy is difficult

Consultancy, however, you decide to price it, is primary on a pro-rata basis. That means that you exchange time for money, at least in as far as software consulting goes. I stand corrected on other industries and models. Therefore it means in order to scale, you either have to charge a premium or increase the man-hours — both of which come with trade-offs.

The first trade-off is with regards to charging a premium, which requires a very high brand positioning (increase in marketing cost to change the narrative from price-based to value-based). The second one is finding that differentiating factor.

If you are lucky enough to find the intersection for these two, it narrows your business down to a niche making it lose its staticity. A static business is one where almost every customer contributes an equivalent amount to the business. Ergo, losing one customer would not cause such a huge glitch. Having a few customers paying you such huge chunks means you become beholden to them. On the other hand, increasing man-hours introduces enormous complexities beyond just operations and management. It also means increased running costs.

High margins but poor cashflows

Making financial projections for a consultancy, especially a small or medium-sized one is near impossible. If there’s one lesson I have come to learn, is that while profit is nice, cashflow is king. Cashflow provides insights into the health of the business. A business with high cash flow and little margins can service. The reverse presents a rather tricky situation. And that’s the thing with a consultancy that we figured, especially given our size — it has very poor cash flow.

It’s the same amount of hours

It takes the same amount of effort to build for a client an application that it would roll out an internal product that can be written once and just maintained. And while the initial effort might seem daunting, the slippery slope if it picks up makes it worthwhile.

So we folded our sleeves and decided, based on the Pareto principle, 80 or even 90% of our effort would go towards building internal products. Our goal at the moment is, therefore, to focus on creating solutions to what seem like stupid problems, and yet they have a wide range of people who’d benefit from them.

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