I had a meeting with a connection, John McCardell, who has developed a strategy for companies to set intentional processes that align with natural fiscal periods to get ahead of the data pertinent in decision-making. Here’s the interesting part – it’s exclusively fitting for architecture and engineering fields.
What is the strategy?
The main premise is that the first steps in taking control of your firm’s financial success should center around the billing cycle, timesheets, and most importantly, the backlog. With snapshots of the company’s financial health shared openly through key performance indicators in management team meetings, this transparency can provide both short and long term visions of the firm’s success.
Basic inclusions on an income statement (revenue, expenses, net income) create grounds for firms to establish goals based on real information. It was explained to me that a common tendency is for internal staff to look at financials and rest assured they’re not in the negative. While this is always a goal, to look at financials and use them while instilling goals, you’re working proactively instead of reactively.
Why exclusively A/E firms?
With my sights on the construction end of things, I was curious why contractors weren’t invited to the party. It ends up that with material costs, this form of professional service becomes a bit more complex to manage than straight labor driving overhead in an architect or engineer’s situation. One critical area to evaluate is billing cycles, which has obvious connections to the GC world as well. In a Zweig Letter blog piece, this is explained a bit further:
“Not having a recurring cycle each month will not only delay the invoicing, but it will also delay your cash collections. Also, it is important to remember when invoicing it is not only for the benefit of your own firm’s financing but also for the client as well. Progress billing allows the client to break up the contract fee in smaller increments each month, rather than a large invoice quarterly or even worse one large invoice toward the end of the project. It is also usually easier for the client to approve small invoices which means getting your money quicker.”
What is the most important component to remember?
The financial metric that John stressed as key to me in the AEC industry is the project backlog. This encompasses all projects that have been contracted, however not yet billed. Since this is the figure that drives revenue, profitability, labor resources (appropriate hiring/staff levels), proposal targets, etc., it holds a lot of weight in forecasting future financial performance.
This was also outlined clearly in a Zweig Letter blog by John:
“Once you have some historical data, this metric is useful for projecting the firm’s future financial health when used with outstanding proposals and conversion rates. This offers decision-makers time to allocate resources and seek additional employees and resources before it’s too late. Weekly reports can help look for billing opportunities, locate stale projects to eliminate from backlog, and find unbilled hours, among other uses.”