Among other things, the Great Financial Crisis reminds us that cash is critical. In the face of projects slowing down or stopping altogether, it will buy the time you need to stabilize your business while demand for your work resumes once again. We don’t know the depth or length of the current crisis, but the amount of cash you have, can get your hands on and can marshal wisely will largely determine your firm’s ability to weather the current economic challenges and allow your firm to compete again. 

If you are not currently forecasting your cash flow to at least six months out, now would be the perfect time to start. The key to accurately predicting your cash position is to be realistic about your future billings and the timing of their collection, as well as the collection of your current accounts receivable. Add to that a conservative estimate of your usual overhead and payroll expenses and any other cash items like payments on debt you have, additions to debt, taxes, and capital expenditures, and you have the majority, if not all, of the components of your cash flow.  

 

A few more words about backlog: to forecast your future billings, you have to know where you stand on your contracted backlog. If you are not currently tracking backlog through your accounting software, then you can do this in Excel. There is some initial time to invest in setting up the spreadsheet, but once you have, it is not time-consuming to keep it updated after you do your Billings.  

Remember, your forecast does not have to be perfect, and it will most certainly not be, as the timing of collections is hard to predict. You just need a tool that leads to proactive, intentional action ahead of any problems that it identifies. You should update your forecast weekly, maybe even daily, if your cash position is that tight. 

Here at ROG, we regularly advise our clients on the importance of being able to access external sources of cash to smooth out collection issues, fund growth, take advantage of opportunities that invariably arise or to see you through tough times. How quickly you would like to access this cash, which in some cases might be the same day, will dictate which source(s) you use: bank line of credit, short-term or long-term financing, or even your owners and investors. No matter which you choose, you should at least establish a relationship with a local bank, if you haven’t already done so, to explore which financing sources are an option for you and to establish credit. If you already have established credit, you should consider asking your lender to review your credit capacity and ask if they are willing to increase it. You might be pleasantly surprised at the willingness of lenders to work with you, even during difficult financial periods such as this one.

When times are good in the design business (or in any business for that matter), the tendency is for expense levels to increase disproportionately to revenue. Said more plainly, we get complacent and spend too much. Now is a good time to scrutinize your spending to identify things that the elimination or reduction of would not jeopardize your current or future operations. Because your time is valuable, I caution you about trying to save money by cutting back on low-impact line items that will not move the needle enough. Instead, I suggest you focus on two areas that can have a significant impact on your expenditures and profitability: eliminating under-performing service offerings and under-performing staff members. 

By under-performing service areas, I mean any project, client, discipline, market, or product delivery type that does not add to either your firm’s bottom line profitability or another service area’s profitability. For example, let’s say you are an architecture firm whose clients are diversified among local developers, school districts, national hotel chain operators, local government, etc. When you examine the profitability of each type of client, you discover that your local developer work is consistently unprofitable. Perhaps you should consider discontinuing that type of work, or re-engineering your pricing and delivery method so that it can be profitable. 

Likewise, if you have staff members that consistently under-perform, now would be the ideal time to release them to industry, as difficult as that might be, and evaluate whether they should be replaced later or not at all. Remember, it is highly likely that unproductive time (think non-billable time) is most likely the single highest overhead cost you have and, therefore, reducing that line item can impact your cash flow significantly. You will want to make sure that any staff reductions do not negatively impact your compliance with any Paycheck Protection Program covenants. 

Winston Churchill said, “Never let a good crisis go to waste.” Taking proactive steps such as the ones I’ve suggested above should position your firm not only to weather this current economic crisis but also flourish as the economy rebounds. If you would like to learn more detail about the three areas I’ve outlined or about the other ways we are helping our clients prosper during these difficult times, please give us a call. 

And, don’t forget to update your ownership transition planning, which is even more critical in the new economy that will emerge. For more information on this subject, visit our website, and read past Perspectives. And when we finally do come out on the other side, please consider attending our Growth & Ownership Strategies Conference at the Ritz Carlton in Naples, Florida on November 4-6.