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Why Effective Financial Management is Critical for A/E Firms
April 21, 2020
Many members of our team have been involved in the financial management of architecture and engineering firms for nearly three decades. That span includes three recessions and a fourth that we are headed into now. We can’t tell you how many times through the years our financial management role has been deemed “non-essential” to the success of the firms we’ve worked for or with.
And while we’ve gotten used to hearing that, we’re still surprised that accountants, bookkeepers, controllers, consultants, and even CFOs are often referred to as “necessary overhead”—that is, until the time that the effectiveness of a firm’s financial management can make the difference between the business surviving and folding. Now, as the world struggles with a pandemic and the aftermath, is one of those times.
The Difference Between Engineers and Accountants
It’s been humorously suggested that the biggest difference between engineers and accountants is that accountants will admit they can’t do engineering. And even for those A/E firm principals that have some accounting background or acquired skill, it’s never the best use of their time.
You don’t focus on learning how to put out grease fires when you’re taking a cooking class—you just enjoy acquiring new skills, knowing you’ve got a fire extinguisher under the sink. But when the stove erupts in flames and you realize the extinguisher you haven’t tested in decades is no longer operational due to lack of use, now a bad situation has gotten much worse. That, in a highly dramatized nutshell, is often the relationship between firms and their accounting staff.
"A skilled and experienced financial management professional or team, and the tools to support them, are essential to any A/E firm."
What You Should Be Doing Now
There might not seem to be much value in hearing what you should have been doing, from a financial perspective, for the last several years. However, focusing, for a bit, on the past can help you see what you should be doing today and going forward.
Proactive financial management should be one of the primary functions at your A/E firm. When it comes to your performance in good times or your survival in difficult times, it’s no less important than landing new work or completing projects. That’s especially true for smaller firms that have smaller margins and are perpetually close to the edge of a dangerous financial cliff, even if they don’t always know it.
Before our current recession kicked in, the A/E industry had been enjoying more than a decade of prosperity. Consequently, firms got by with minimal time or effort devoted to their finances, and often experienced double-digit growth simply as a result of the steadily rising economy.
Now, at the start of what may be a fairly significant economic downturn, firms are starting to take a closer look at their balance sheet. What they see there is directly correlated to their answers to some key financial questions. Have you taken steps to improve the way you manage accounts receivable? Have you implemented automated billing processes to help you manage WIP? Have you developed strong relationships with your subconsultants that improve the handling of accounts payable? Have you worked with your bank to ensure you’re managing your debt properly? If you answer “No” to these questions, this recession may be particularly challenging for your firm.
Tactics for Improving Your Financial Management
If you haven’t given financial management the love it deserves recently (or ever), here are some steps you can take now to try to steady the ship during this financial storm:
- Concentrate on generating cash. Assess all of your projects to determine which ones can generate the most revenue generation over the next few months. Focus your staff on those jobs and be ready to bill them as soon as the data is available. In the current environment, your invoices are as important as any other deliverable you send to clients!
- Offer discounts for fast payment. Payment discounts can be painful, but right now they can help you get the cash you need promptly. Talk with your clients about what you’re considering and explain that their prompt payment will help you help them. Let them know that the discount may be temporary, but that you’re hoping to shorten the billing cycle going forward.
- Talk with your subconsultants and the firms you are teaming with about their next round of invoices and your firm’s cash flow projections. Working more effectively with them can ensure that everyone gets paid on time. And having a clear understanding of your net cash over the next 90 days is critical.
- Ask your banker how they can help you. There are many SBA programs available through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. However, in order to leverage these programs effectively, you need to have a clear picture of how much capital you need, why you need it, and how long you need it. Be prepared to provide the busy banker with the information they need along with your clear request if you want to give your application the best chance of being approved.
- Take a fresh look at your project and profitability management software. Whether you make a change now or simply identify the need and act on it as soon as the opportunity presents itself, your project managers have to have a system that enables them to work more efficiently and collaborate with accounting more effectively regarding tasks like revenue forecasting, prompt and accurate invoicing, managing WIP, and providing more accurate and actionable intel on the firm’s financial standing.
The Case for Effective Financial Management Becomes Clear
If the tasks above and all the work required to complete them seems daunting, it’s probably becoming clearer to you how important effective financial management is. Fortunately, the steps you take now, the improved financial management practices you put in place going forward, and any upgrades you make to your financial management systems will benefit your firm in good economic times and bad.
A skilled and experienced financial management professional or team, and the tools to support them, are essential assets to any A/E firm - Not only when a crisis arises.
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