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Expanding Your Financial Management Capabilities as Your Firm Grows
September 4, 2020
As architecture and engineering (A/E) firm owners know, the “financial management” in a new or very small firm is all about getting invoices out and paying bills and employees on time. And often the person who gets assigned those tasks is a “utility player” with many valuable skills, including basic bookkeeping.
However, soon the principals start to look around at other firms and become interested in benchmarking and comparisons to see how the firm’s performance stacks up against industry peers. Inevitably, this leads to the realization that the firm needs to move beyond basic bookkeeping and start doing more in-depth financial management. This can, of course, put the bookkeeper in a tough spot.
Changing Goals May Mean Changing Roles
As owners begin to focus on managing the firm’s finances more effectively, a utility player who’s good with numbers may be asked to expand their financial responsibilities, with a new hire taking on some of their non-financial tasks.
If the utility player doesn’t enjoy the accounting aspects of their job, the firm may struggle to find someone (or find it within their budget to pay someone) who will take on a role that may not quite be a full-time position. If that person can’t be found, some owners will turn to a CPA firm to get the financial management knowledge needed to supplement the utility person’s bookkeeping skills.
This approach comes with its own challenges, of course. If the accounting firm doesn’t have A/E-specific knowledge of the industry or of a software package they can point the firm to, owners may become frustrated that they’ve brought in more expertise but still aren’t getting the numbers they need to benchmark their performance as compared to their peers.
Bringing on a Full-Time Financial Management Professional
In many cases, frustrated firm owners may now choose to hire a full-time financial manager. Here again, there are issues to be overcome when choosing this path. One is that the firm has taken on a significant amount of additional overhead.
Another is that this approach puts the newly hired financial professional on the hotseat. Expectations are sky high, but the person is still using generic software to try and provide A/E-specific insights. And when they suggest a new system would be helpful, often the reaction—whether stated or clear from people’s behavior—is, “What? We hired you because you know our industry. Why do we now need to spend more money?”
However, what we’ve found is that bringing in the expertise is only half the battle. If you don’t equip them with the right tools, their ability to track and report on KPIs, and therefore their impact on your financial performance, will be minimal. Many owners are reluctant to implement new software, in part because the systems they’re familiar with are installed locally and must be purchased outright, which means a large upfront investment. A better option, of course, is using a cloud-based system that’s paid for on a subscription basis.
"With all the other responsibilities owners have on their plate, it can be difficult to step back and consider the best way to grow the firm's financial management capabilities. However, it's important they do."
The Next Hurdle: Timeliness
With a financial professional in place and a software solution designed for the A/E industry, firms are often “good to go” until they reach a headcount of 25-30. Then, the next issue typically encountered is volume and its impact on timeliness. There are only so many hours in a day for a person to work, and sometimes there aren’t enough hours and days to get invoices out and bills paid as quickly as you (and your clients, vendors, and employees) would like.
According to industry experts, the maximum ratio of billable employees to accounting staff is roughly 17 to 1. There’s some flexibility, of course, but when a firm starts to feel the strain, they have two options: hire someone, which likely means they’ll then have excess capacity, or get supplemental help from an A/E-focused accounting firm. If you go with supplemental-assistance, you can continue in that way for quite a while as the firm continues to grow—potentially up to 45-50 people. At some point, however, the cost of outsourced expertise becomes greater than the cost of hiring a new employee.
The Shift From Financial Reporting to Financial Analysis
What we’ve found at the A/E firms we work with is that somewhere in the neighborhood of 75 employees, owners want their financial professionals to go beyond simply tracking and reporting KPIs and instead perform more complex financial analyses. They don’t want to look back at the numbers, but rather to get ahead of them.
Now, the need for a controller or CFO position is clear. Can your existing financial manager fill the role? Will you need to hire from the outside? Would it make sense to have a CPA firm provide CFO-like input? These are questions you need to answer.
For many firms we talk with, hiring a CFO or promoting someone into that role is a great investment. Not only does the person have the knowledge the firm needs, but as an employee, they’re more in touch with daily operations and how they impact short- and long-term financial performance. Leveraging their expertise and all the intel they can gather on allocation of resources and tax law and payroll levels and more, a CFO can anticipate and address financial issues that limit a firm’s growth, meaning the role can “pay for itself” many times over.
A Caution on “Favor” Promotions
It’s important to recognize the hard work, dedication, and loyalty of your accounting team. However, doing so by promoting someone who isn’t ready for the next level can be a major mistake. Often people put into those types of situations “crash and burn,” departing the firm irritated and angry, and taking all their knowledge and experience with them. Doing someone a “favor” by handing them a new role really isn’t doing them a favor at all.
Growing Your Financial Management Capabilities Wisely
With all the other responsibilities owners have on their plate, it can be difficult to step back and consider the best way to grow the firm's financial management capabilities. However, it’s important they do.
Knowing when to add staff, when to implement a purpose-built A/E industry financial management platform like Factor AE, when to leverage outside accounting resources, and when and who to promote into more senior roles can be the key not just to a firm’s financial success, but to its overall success.
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