Managing your architectural firm through turbulent times: key actions you can take today

Having worked in the AEC industry for over 35 years, I’ve seen and experienced most economic conditions and their impact on architectural firms. 

While no two economic downturns are the same, they all share a number of similarities and actions that should be taken to ensure business continuity and longevity.

Here are four key areas to be keeping an eye on during turbulent times, as well as the actions you can take to keep your firm afloat:

Project profitability

In AEC businesses, people often adopt the mindset that the firm will survive if the staff are busy. However, this isn’t the case. 

Working on loss-making projects, or projects that will make a loss because of the fee agreement, will only eat away at the cash reserves. It is only profit that generates cash. 

Decisions made in difficult times can often lead to a hangover due to the lag that comes from accepting low fees on long-term projects. Currently, this will be exacerbated by the prospect of salary inflation, which is increasing costs further on those projects. 

Actions to be taken:

• Fully understand the profitability potential of every project and bid
• While some projects may warrant zero profitability, no project should be forecasted to make a loss at the start
• Projects should be reviewed monthly against the budget set and their forecasted profitability
• Ensure the entire project team knows the agreed scope of service
• Encourage the idea of recognizing variations and any additional fees they may accrue

Resource utilization

Staff are the only real asset a firm has—and they're also the most expensive. The effective management of staff is critical. 

In tough times, the capacity of your staff has to be flexible and switching from project to project needs to be managed effectively, with resourcing decisions made from real-time information and accurate forecasting.

Actions to be taken:

• Fully resource out all projects
• Understand your team’s strengths and weaknesses in order to get the best from them
• Always review for any necessary redundancies. There is the option to put staff on notice–even if only temporarily 
• Have a team of freelancers ready—that way, you can avoid a recruitment and redundancy cycle
• Prepare a list of non-project duties for any downtime. Marketing activities and research are a wonderful way to avoid loading existing projects with cost, while increasing the chance of winning new work

Management reporting

No action or understanding can be effective without information. In a fast-paced and ever-changing environment there is a need for reporting to be in real-time and relevant for any actions to be effective. 

Overhead reporting is often a waste of time and effort, having little impact on efficiency. Projects, on the other hand, are the main sources of profitability and loss, with resourcing being their main cost – highlighting that these areas of reporting need to be the ultimate concern. 

There are a few fundamental reports that all firms should utilize:

1) A fee forecast 

A list of project fees and estimated invoice dates are the pinnacle of information. It allows for a forecasted cashflow and an understanding of basic resource requirements. However, as with any reporting, it’s only as good as the information entered. Care should be taken to not just include confirmed invoicing, but also potential invoicing, albeit weighted by probability. 

This full approach ensures that you can see your pipeline of potential work or where there is an unfortunate void. There is also the chance to add information, such as sector or client, which shows vulnerabilities— namely too much dependence on one particular sector or client.

2) Resource plan

Planning out resources is both essential for a project and for the business. At a project level, it provides an estimated cost to complete and expected profitability. This provides an early warning of any profitability weaknesses. At a business level, it provides a cost to deliver the commitments, potential work, and the resources required to deliver that work.

Comparing this to the forecast will provide an indication of cashflow requirements or contribution. This resource plan should include both committed requirements and potential requirements. As with the fee forecast, the resource requirement on potential projects can be weighted by the probability of those projects or stages.

3) Business cashflow

Feeding off the fee forecast to provide income estimates is one of the most essential reports, as it includes appropriate delays for payment and overheads to include salaries, tax, rent, rates, and more. This will give you a clear view of your expected bank account balances. 

You will need to run a number of these; one ‘worst case’ working with confirmed fee income, and a couple more based on probable income. Always be prudent with payment dates, and remember: no one ever got fired for invoices being paid before their anticipated payment date.

Actions to be taken:

• Agree to hold weekly, monthly, and quarterly meetings with all of the information readily available
• Consider the use of an outside professional to advise, or utilize a non-executive director to help guide decisions
• Take minutes of meetings and agree action plans
• Assign tasks and deadlines
• Only accept information from the agreed reports

Cash control 

Most critical issues revolve around cash; its receipt (income) and its expenditure (overheads and direct costs). Project invoicing is critical as the management of income comes from the projects themselves. The management of expenditure will involve looking at direct costs, which are those costs involved directly with projects, and overhead costs such as rent, rates, PI etc. 

Unfortunately, there is a pattern in which clients like to be invoiced at the end of the month, coinciding with when staff wish to be paid (if on a monthly invoice schedule or through time charge). This means the amount of all outstanding invoices, regardless of payment terms, is the total working capital needed to maintain the business.  

With the inevitable tightening of clients paying on time, I would suggest a good buffer would be two months average invoicing. To cover this sum, look at bank overdrafts, peer to peer lending platforms, and ideally build up that cash sum yourselves. 

Here are some of the key areas firms should be monitoring around cash:

1) Project invoicing

A robust and enforced credit control process will help with income cashflow. Regular statements and a close relationship with clients’ accounts teams will help with accuracy of payment times. Confirming the payment address and billing details prior to invoicing will help reduce delays, and calling a week prior to payment date will identify any issues and allow you to feel confident on your cashflow predictions.

2)  Project cashflow

Projects are at the heart of a business's cash position. Setting up your projects to not have a negative impact from the start is essential. Looking at your proposed invoice schedule against your proposed scheduled costs allows you to clearly see this.

3) Consultant payments

If consultants fall under your remit, you’ll know that regardless of payment from the client, the payment from the consultant will need to be made. With some of these amounts being substantial, the careful management of these payment dates can be important. 

Agreeing the schedule of invoicing for both the client and the consultants while leaving enough lead time between receipt and payment can really help. Agreeing 60 day payment terms with your consultants and 30 day payment terms with clients may also help. 

‍4) Salary cost

The most significant cost of your business is salaries, ensuring that all fee-earning staff are fully utilized will ensure that their cost is fully devoted to earning fees. 

Actions to be taken:

• Forecast the cashflow of all projects and take this into account when agreeing invoicing schedules
• Understand and agree the client’s invoicing process
• Build a good relationship with your clients’ accounts department 
• Adhere to your agreed credit control process—send reminder letters, etc
• Manage your consultants’ payments process
• The first invoice will be where you find out all the foibles of the clients invoicing process and system. Don’t leave it to be a £50,000 invoice, send a first invoice as soon as you can, even if for a small amount

‍

There is no simple set of solutions to managing your firm through a recession or downturn. Each firm is different, and each situation is different. However, information is key, and understanding the past and predicting the future costs, income and your ultimate cash position will help immensely.