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As an architect, you want to spend your time designing, creating, and innovating. But as a firm principal, you need to make sure you have a healthy cash flow to pay for those projects and support your passions. Manage your cash flow well, and you can stay in business, even when you’re not operating at a profit.

Unfortunately, many companies fail to properly manage profit and cash flow. According to a study by U.S. Bank, 82% of businesses fail due to cash flow mismanagement. And a survey by Fifth Third Bank found that 4 out of 10 small business owners didn’t have enough cash to meet their business goals.

Examine your own processes. How many days after sending and invoice does it take to see a check show up in your back account? Studies put the average collection period for AEC firms between 70 to 80 days. Can you go that long without getting paid for the work you perform?

If you want to avoid the perils of poorly managed cash flow, pay attention to these tips.

1. Understand the Basics of Profit and Cash Flow Analysis

Understanding the terminology used in profit and cash flow analysis is essential to managing the finances of your business. Here are some key terms you should commit to memory:

• Break-even: The level of revenue required to produce operating results with zero profit (sales revenue less cost of payroll, overhead, and other expenses equals zero).

• Burn rate: The rate at which cash is burned or consumed by a business that is operating at a loss (or at a very low profit margin possibly).

• Extending the runway: If you’re forecasting cash to run out in four months but a new source of cash (such as a new contract) won’t be available for six months, you must find a way to stretch your cash, or “extend the runway” to reach the next funding date.

It’s also important to know the actions that raise and lower cash flow.

Actions that lower cash flow: 

• Increasing accounts receivable and inventory

• Decreasing accounts payable and accrued expenses payable.

Actions that raise cash flow: 

• Decreasing accounts receivable and inventory

• Increasing accounts payable and accrued expenses payable.

2. Improve Your Efficiency 

Improving your firm’s cash flow starts with you and your employees being efficient with projects and processes. Measuring the right KPIs in your project performance will help you determine how efficiently your team works and pinpoints which tasks and areas need improvement (Related: 10 Key Financial Metrics to Measure Your Project Performance).

While your KPIs may change for each project, you should consistently track the following for each phase of a project:

• Hours to date

• Total hours budgeted

• Hours over budget

By analyzing your actual hours-to-budget projections and seeing your costs incurred by phase and task, you can identify problem areas and allocate resources more effectively, such as distributing project tasks more evenly across your staff to balance the workload. Having this data also helps you make more informed decisions on how to budget for future projects.

When it comes to non-billable tasks and processes, efficiency matters even more when it comes to cash flow and profitability. The less time your team spends on non-billable tasks, the higher your firm’s utilization rate will be, which improves profit margins. And the quicker and more accurately you handle activities such as timesheet processing and invoicing, the sooner you can get paid.

3. Monitor Accounts Receivable

As mentioned earlier, increasing accounts receivable lowers cash flow. That’s revenue you’ve earned that hasn’t hit your bank yet, so it’s vital to keep A/R to a minimum. It’s your responsibility as an owner or principal of your firm to follow-up with clients who haven’t paid their invoices. The quickest way to take care of an overdue bill is to pick up the phone and request a prompt payment from your client. 

If you’re anxious about upsetting a client by hounding them for payment, delegate this task to someone else on your team. That way you can always be the “good guy” and keep the client relationship amiable while still ensuring that you collect your money.

4. Pay Attention to Reimbursable Expenses

It’s not just Accounts Receivable that should be constantly monitored; reports that show detailed expenses to be billed to a client also need constant attention. 

Does this scenario sound familiar? You submit an expense report to a client, then several months later discover another batch of expenses that had been overlooked. Those missed expenses erode your margins and cash flow. Be sure to get paid for every reimbursable expense you incur during a project. $10 here and $25 there can add up quickly when cash is running short.

5. Don’t Forget About Uncle Sam

There comes a time each year when principals and owners, who fail to do their homework, see the dramatic difference between profit and cash flow. Some call this “The Season of Tears” and others know it as “The Great Reckoning”. But most of us just refer to it as tax season.

That’s because it’s possible to be profitable but cash poor at the same time. You must remember that you get taxed for every dollar of profit you earn.

If you don’t put that money aside and protect it (ideally, in a dedicated bank account you never touch), you can easily find yourself not having the money you need when Uncle Sam holds his hand out.

That’s another reason why understanding cash flow is so important. Your business may show it made a certain amount of money on paper, but that doesn’t mean you actually have money on hand.

6. Pick Better Clients

While good invoicing processes can improve your cash flow, ensuring you’re working with ideal customers is also important. If you don’t get paid, you won’t have the cash to run your business. 

Protect your cash flow by:

• Doing credit checks before signing a client

• Establishing payment terms (e.g. “net 30”, meaning clients have 30 days to pay your invoice), making them clear on the contract, and ensuring clients understand and agree to terms

• Charging late fees for overdue invoices to incentive slow-to-pay clients to make payments promptly

• Using an online payment system with clear records

You should also look at historical data to see which clients tend to pay late, so you can be proactive about handling establishing clear payment terms (and consequences) the next time you work with them.

7. Use the Right Software to Make All of This Easier

The fastest and most effective way to do everything suggested in this article is to use a software platform that handles it all. If you rely on manual processes or disparate systems, you’ll end up being less efficient, which defeats the purpose.

Your software should give you an instant picture of your firm’s financial performance, because you can’t navigate the ins and outs of profit and cash flow without actually knowing the numbers. At any given moment, you should know:

• Exactly how your business is doing

• How much money you’ve invoiced

• How much you’ve received

• If you have enough to pay your bills on time

You should also be able to immediately see the performance of every project, proactively manage Accounts Receivable, easily capture billable time and expenses, and streamline your invoicing & collections.

BQE Core was created for architects by architects in order to empower them to run their firms with elegance and ease. It’s a platform that simplifies all the complex day-to-day elements of your firm to help speed up cash flow and boost profitability. Click here to learn more about BQE Core.