It is not unusual that in many cases, the amount of time spent between the client and the advisory firms negotiating the rates takes more weight than discussing the actual scope and services.
In this context, it is important to understand that we pay for the expertise brought to us by the advisor or the consultant. So, it is very important to appreciate the level of experience brought to us and match it with our actual needs to avoid any unfair rate comparisons. Think about sitting with legal advisors, you wouldn’t approach a senior partner with very high rates to deal with junior paralegal tasks.
Pricing advisory and consultancy services can be simple, and nailing it is a crucial aspect to strike the right balance between providing value to the clients while ensuring the consultancy boutique remains safe from loss making.
In this blog, we'll demystify the process of calculating daily and hourly rates that are needed to determine the retainer fees, with a specific focus on Fractional CFO services – a key offering in our consultancy firm. The same logic, however, applies to venture building advisory, management advisory, or any other type of advisory. By the end of this article, you'll not only understand how these rates are calculated but also be equipped to generate your own pricing after determining few data points.
Understanding Regional CFO Salary Benchmarks
Before diving into the specifics of rate calculation, it's essential to have a baseline understanding of the regional CFO salary benchmarks. According to major HR consultancy and recruitment agencies, CFO salaries in GCC can vary significantly based on the CFO profile, the business size, and the revenue level of the company they serve:
SMEs (Revenue < 250M AED): For small and medium-sized enterprises, the CFO take home salary range extends from 45,000 AED to 70,000 AED per month.
Large Enterprises (Revenue > 250M AED): In the case of large enterprises with annual turnovers exceeding 250 million AED, CFO salaries can range from 90,000 AED to 160,000 AED per month.
For startups and scaleups, the future revenue in the business plan, funding plans and the business model complexity plays a key role in the sought fractional CFO profile and fees accordingly. It is worth noting that in the case of early-stage ventures, advisors and consultants tend to receive a blend of equity and cash considering the limited financial resources of startups.
Calculating Man-Day Rates Methodology (simplified):
Now, let's break down the steps to calculate a consultancy's man-day rate effectively. We'll start with the CFO's take-home salary as a reference point. As mentioned earlier, this can be done to other advisory roles similarly.
Step 1: Calculate Yearly Gross Compensation
Begin by multiplying the CFO's take-home monthly salary by 12 to obtain the annual gross compensation.
Step 2: Account for Additional Compensation Components
To this yearly figure, add other yearly components such as:
Yearly bonus
End of service gratuity
Children education support
Health/ Life insurance
Other compensation benefits
This step provides a comprehensive view of the CFO's (Advisor/Consultant) annual cost to the company.
Step 3: Include Company Overheads (Allocation per head)
Factor in your consultancy firm's annual overhead costs, which encompass office rent, utilities, technology infrastructure, and other administrative expenses.
Step 4: Determine Net Billable Time Percentage %
Next, estimate the percentage of billable time the CFO (Advisor) will spend out of the available 221 working days per year to produce the Net Billable Time. The balance % represents all the non-billable activities like internal meetings, administrative work, and other non-client tasks.
Step 5: Determine Pre-Tax Profit Margin %
Now, decide on your desired profit margin for the business (excluding Tax).
Step 6: Calculate Daily Rate
Once all the above are determined, divide the total annual cost (step 1 + step 2) by the Net Billable Time (Days available out of 221 Days) from Step 4 to obtain the daily rate for your consultancy service. Then adjust the rate based on desired profit rate.
Step 7: Calculate Hourly Rate
To calculate the hourly rate, divide the daily rate by the average number of billable hours per day, usually 7 (excluding lunch break, prayer, etc..).
Let us take a high-level example:
Assuming an SME CFO's yearly take home salary is 720,000 AED, additional compensation components total is 360,000 AED (Bonus 100,000, Insurance 60,000, Education Support 80,000, EOSB 60,000, Overheads 60,000), and a pre-tax profit margin of 15% is applied, the daily rate calculation would look like this:
Yearly Cost (Step 2+Step 3) = 720,000 + 360,000 = 1,080,000 AED;
Now, if the billable % (step 4) is 80%, then the Net Billable Days is: 221* 80%= 177 Days
So, the Daily Rate before Profit = (1,080,000 AED / 177 billable days) ≈ 6,102 AED; Now considering the 15% targeted profit margin, the New Daily rate is = 6,102/(1-15%)= 7,179 AED. Hourly Rate (Step 7) = (7,179 AED / 7 billable hours) ≈ 1,026 AED
Conclusion
Understanding how daily and hourly rates are calculated for consultancy services is crucial for both consultancy firms and clients. By following the steps outlined in this blog and using regional CFO salary benchmarks as a reference, you can confidently determine your consultancy rates. This transparency not only saves time in rate negotiations but also empowers clients to assess the value they receive.
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