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How to Improve A/E Firm Cash Flow in a Crisis
May 11, 2020
Financial management systems for architecture and engineering (A/E) firms understandably focus on profitability and budgets. However, in some instances like the sharp decline in revenue that firms are grappling with as a result of the COVID-19 pandemic, cash flow is temporarily the top priority.
But that doesn’t mean a product like Factor AE is useless. In fact, if you have your projects set up properly and are ensuring they’re continually up-to-date, there are a number of ways that the system can help you accelerate cash flow from the work you currently have.
Profitability and Portfolio Be Damned (for the Time Being)
We’ve heard from many A/E firms in recent weeks who say that despite the fact that the economy is slowing due to the coronavirus outbreak, they still have a good amount of work. Unfortunately, it’s not enough to keep everyone busy and meet their budgets at the same time. Our response is, “To heck with the budgets! For right now, anyway.”
Many firms that have made profits on an accrual basis have nevertheless gone bankrupt through the years for lack of cash flow. The inability to make payroll starts a domino effect where employees leave to find a job where they get paid reliably, clients get irritated and move to other firms, and revenues drop further. In other words, cash flow is critical, especially when employees are already spooked by the declining economy.
The same applies to projects that firms had identified as “portfolio builders” before the crisis hit. While it’s still important to produce high quality work on those jobs, it’s now more important to complete them quickly and efficiently so that they can be billed and bring in revenue.
Putting the Focus on Cash Flow
Here’s what we recommend to A/E firms that are in dire need of cash: Start by going through all active projects to see which clients are deadline-driven. By looking at what was stated during the proposal process and reviewing the schedule, you can determine which clients need you the most. With that information in hand, you can reallocate resources away from companies who aren’t in a hurry and dedicate them to clients who have deadlines.
Then you say to the client, “We currently have some excess capacity. How about we accelerate the timeline on your project?” Assuming they agree, you can then talk about accelerating payments as well. Ultimately, they feel like you’re doing them a favor when, in fact, it’s really the other way around.
Clients that aren’t deadline-driven will want to continue to see progress on their jobs, of course. However, the smaller invoice they receive after you reallocate resources may be much appreciated.
"Cash flow is critical, especially when employees are already spooked by the declining economy."
How to Manage Accelerated Projects Effectively
As you reallocate resources, you also need to think about how to reorganize your teams so that high-quality work gets completed and billed quickly. Employees are not, of course, interchangeable. The goal is to configure things such that less expensive people are completing more expensive tasks. For example, you don’t want to just throw resources at a project and end up with a highly paid employee doing simple drafting.
You should also see if deadline-driven clients are willing to move to bi-weekly or even weekly billing. If they are, create custom billing sequences for them so that you can quickly and efficiently get invoices out. It can be a real win-win: you get paid faster and the client gets more frequent but smaller invoices and a project that’s completed ahead of the original schedule.
There may also be an opportunity for financial flexibility if you work with subconsultants. If you bill the client for the sub’s work to date every week or two weeks, but the sub only expects to get paid monthly, that extra cash in your bank account can be helpful.
Getting on Top of Accounts Receivable
Another place to increase cash flow is AR. We encourage firms to look for clients that have long-term amounts outstanding, and see if they’d be willing to pay more quickly if you gave them a discount. Generally speaking, we’re not fans of discounts, but when a firm has its back against the wall, they may be necessary. As little as 1-2% may be enough to increase cash flow so that you can continue to make payroll or meet other obligations.
Forecasting Cash Flow
Next, your CFO or other accounting expert should do a cash flow forecast out as far as the current projects will run, keeping in mind that the projection is only as accurate as the information accounting gets from the project managers that work with clients. The planning horizon will likely be shorter, since you’re accelerating the pace on the projects, but you need to know where your financial “cliff” is and how the firm will fare if everything goes as planned. Then you should also develop a financial plan B, and probably C, in case the downturn lasts longer than expected, the clients can’t keep their promises, staff can’t produce the quality of work you’d hoped for, etc.
These backup plans are important, in part, because they help you maintain the confidence of your staff. The last thing you want is to announce this acceleration strategy, give your people hope, and have the whole thing come crashing down with you having no idea about what to do next.
If all else fails, you can consider borrowing money, but that should be avoided if at all possible. Loan repayments are not tax deductible, so ultimately you end up having to make $1.40 in order to come up with $1.00 of debt repayment. This is especially problematic when it comes on the heels of a project acceleration strategy that has eaten up your future profits.
Communication with Clients Is Key
Engineers and architects tend to love generating work but not talking to clients about business. Getting past that reluctance, while it isn’t easy, is critical to increasing cash flow. Fortunately, once the conversations have begun, the rest is just hammering out the details and then getting back to work.
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