BASEBUILDERS. Makers of Smart Management Tools for. Architects and Engineers. Cash Flow Acceleration for Architecture and Engineering Firms

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1 BASEBUILDERS Makers of Smart Management Tools for Architects and Engineers Cash Flow Acceleration for Architecture and Engineering Firms Executive Overview Managing a successful firm is more complicated than drumming up new business, generating revenues, and hiring the A team to fulfill contracts. You also have to manage the finances and unless your firm is large enough to employ a CFO and/or an accounting team, the burden of managing the income and expenses rests solely with you, the firm principal. Understanding the nuances of your company s cash flow is imperative, because if this area is not properly managed it can cause even the healthiest of companies to falter and possibly fail. The firm principal needs to become a deft hand at understanding the ebb and flow of the firm s cash, and using a cash flow forecast can be an invaluable business tool to help you navigate these tricky financial waters. This paper discusses the basics of cash flow acceleration ~ getting your money in the door quickly. Cash Is King Having a strong cash flow is the lifeblood to the success of your business. In the architecture and engineering world we sometimes suffer from a decelerated cash flow process. Part of the problem is clients that routinely pay you on their own terms which leads you to having to float the money. Another part to the problem may be your own internal systems. 80% of business fail in the first 5 years. One of the biggest reasons that business fail is due to a lack of cash flow. Staff Perform the work and your fee is earned. This is your Earned Value. Day 1 Payday comes and you pay your staff Day 7 Client is invoiced for the work Day 25 Client feels generous and pays your invoice Day 80 Timeline of Cash Flow

2 The national average for collections by AE firms is 60 days. The challenge is that quite often you completed the work days, weeks or unfortunately maybe months before you actually send the invoice. This means that from the time that you have earned the value of the work to when you get paid is huge. The average time from when AE firms earn their fee and they collect on that invoice is 80 or more days. However during that timeframe they Earned Fee Calculation still had to pay their employees and cover their overhead. Using your Billing Multiplier you can calculate your earned value. The current range for AE firms is 2.80 to 3.25; we will use 3.0 to keep the math simple. Letʼs assume that you have an employee who spends 30 hours working on a project during the first week of the month / pay period and that you pay this employee $30 per hour (or the equivalent salary). The earned value would be your Billing Multiplier times the pay rate times the hours worked. 3 x $30/hr x 30hr = $2,700 So your firm has earned $2,700 of its fee. The question is when will you bill for this earned value and when will your client get around to paying you for it. What are the odds that you can wait to pay your employees and your overhead expenses on the same time frame? Looking at the graphic above you can see the timeline and cash flow. Since most of us pay our employees every two weeks, we have an average of seven days from the time your fee is earned until you have to pay the employee for the work done. What that means is that as an employee works on a project you continue to increase the earned value of your fee. Hour by hour, and day by day you are earning your fee. However you are not billing at the same pace as you are earning nor at the same pace as you are spending. (And you never will. It is totally unrealistic to think that your billing could keep pace with your earning. At least not on a daily basis.) Also illustrated in the graphic is the time from when you earn your fee until you actually invoice or Bill for your fee. Many firms only bill once a month, usually at the close of a month. By waiting until the close of the month to invoice for the work you ve completed, you are extending or increasing the time between when you pay the employees and when you are going to collect. In most cases invoices don t go out on the first of the month it usually takes a few days to get your invoices processed and out the door. If we take all these things into consideration, from the time the work is done until you actually send the invoices, it is about 25 days. Your goal should be to shorten this time so you can get paid quicker. A simple example if this is a project that just reached a milestone, perhaps it was the design development deliverable. And let s assume the the design development drawings were completed and delivered on the 5th of the month. Are you going to wait until the end of the month look back to see what projects had milestones reached or plans issued and then process your billings? If you do this you re having to float a lot of payroll and overhead cost waiting to get paid from your client.

3 So what are we going to do to shorten the time this process takes? What steps can you take in your office to accelerate your cash flow? Let s start first with how to accelerate your billing so your invoices can get into the hands our your clients. Then we will follow that up with how to accelerate your collections to get the money in the door. Increase Billing Frequency The first thing I want you to consider is not waiting till the end of the month to process your billing. If you re billing is complicated and taking a lot of time to get out the door you need to find ways to simplify your process. One of the ways to help accelerate your billing process is to delegate the invoicing to your project managers. Make it your project managers responsibility to generate invoices and get them into the process so they can be delivered to the client. Acceleration Tips Make PMs responsible for generating invoices Issue invoices weekly or biweekly Donʼt try to bill every project, just those that are ready Give PMs realtime billing data Simplify your systems so billing is not painful - K.I.S.S. When I was a practicing principle at an electrical engineering firm we did our invoicing every Friday. Now, not every project got billed every Friday, but every project that had reached a milestone or had items that we could bill for did get billed. They key to this was having a simple system the enabled our project managers to know exactly where their projects stood and exactly what they needed to Bill on weekly basis. It only took our project managers in few minutes a week to generate their draft and voices and turn them over to our accounting department. The first step in accelerating your cash flow and getting dollars in the door is to delegate the invoice creation process to your Project Managers. Cut The Bureaucracy And Information Secrecy Another symptom that we see plaguing AE firms is the inability to get the information gathered so the billing can begin. You need to have a system that provides real time information to your project managers about the status of their projects; the hours worked, milestones met, and fee schedules. Your project managers should not have to wait for accounting or an HR department to generate reports so that they can produce an invoice. You need to get this information in their hands in a timely manner to expedite the invoicing process. Firms that are not providing realtime information to their project managers are losing up to 15 days in the billing cycle. What I mean by that is it s taking 3 to 8 days after the first of the month to get the information gathered and provided to the project manager so that they can draft or initiate the invoicing process. Then once the invoice is actually finalized, it gets returned to the project manager to approve it and in some cases this step takes several days. So the total impact can be 6 to 15 days from the close of the month until the invoice is in the mail. Delayed

4 A key to getting invoices out the door quickly is to provide your Project Managers with realtime data so that they can stay on top of their billing. Get real-time information in the hands of your project managers so that at any point in time they know exactly where their project sits. They know the status of the project, how many hours have been worked, the fee structure, the status of the project, the last milestone reached on the project. With this information in hand they should be able to generate an invoice for the project in a matter of minutes and have that forwarded to accounting. Now That The Invoice Is Out The Door, Letʼs Work On Getting The Dollars In! Accelerating the collections process can be quite simple. It all starts with communication. And that communication should be between your project manager and client. Now we re not talking about pesky collection phone calls asking for money. What we are talking about is making your billing process a part of the conversation. Here are a few examples of what your project managers can proactively do to keep your firm top of mine mind when your clients are paying their bills. More Acceleration Tips Setting The Expectation First, let the client know what to expect by letting them know that an invoice will be coming and explain what you plan to invoice. Take the time to ask the client if they see any challenges with what you intend to invoice. What you re doing here is getting the client to agree that your invoice is timely and should be paid. Once they have agreed that your invoice isn t going to be for the wrong amount, they have made an indirect commitment to pay that invoice. And nobody wants to go back on their word. Let the client know that the invoice is coming and what they will be billed Once delivered, ask the client if they have reviewed your invoice Ask the client is they have any challenges with your invoice Donʼt ask for payment at this point - talking ʻaboutʼ the invoice is enough The key to this is making this part of the normal day-today conversation with your clients. When your client calls to discuss your project take the time to say Hey, I m going to be sending out our next invoice this Friday. Do you see any challenge with us billing this amount? What you have done if you set the expectation in the client s mind that didn t receive an invoice and be expected to pay. And you ve done so in a very friendly casual manner. Another option that you can do depending on the size of the client which are dealing with and whether they have a lot of bureaucracy, or perhaps you re dealing with a public agency, is to ask them if they have a prior approval process for invoices. So once again in the conversation of the project asked the question: Do you have a prior approval process that we need to participate in for our invoicing? I m going to be sending out our next invoice this Friday. Do you see any challenge with us billing this amount?

5 Make Sure That Your Invoice Has Been Received You do not want your invoice to land in pile on your clients desk, so he next thing you want to do is ask your client if they have viewed your invoice. And again we want to do this in our regular project conversation. It might go something like this; Charlie, have you received our invoice for project XYZ? If the answer is yes then you might follow up with; Do you see any challenges with it or is the amount of okay? What these questions to is again get the client to concur with you that the invoice is fine. Once they have agreed with you that the invoices right, by default they have agreed to pay it. So now we have cleared with the client the right to send an invoice, we ve made sure that they received the invoice, and we ve asked them if there was anything wrong or incorrect about the invoice. However this doesn t necessarily mean they were going to get paid. We may need to bring on additional tactics. Dealing With Slow Payers If the clock is ticking for a while and it appears that the client may be late in paying the invoice, it may be time to open up the conversation again. This could be as simple as asking a few questions. The next time you re having a conversation with the client about the project you might ask them if they were able to process the invoice. If they haven t yet processed the invoice you now have at least put yourself top of mind as a vendor that wants to be paid. If they have to processed the invoice, politely ask them if the check is in the mail. Keep An Open And Friendly Dialogue As a project manager you need to keep a friendly open dialogue with your client. And one of the last things you want to do is to have the issue of money get in the way of that relationship. One way to stay on top of your collections without hurting the relationship is to play the role of messenger. Remember that it is your money and you have the right to ask for it! In other words rather than saying Where s my money?, you might say something to the effect of Our senior partner is wanting to put our cash flow projections together. He asked me when I thought we might receive payment from you. I don t want to embarrass either of us so I was wondering if you could let me know approximately when we might be receiving a check? This is a very effective tool in getting the client to commit to when they plan to pay you. Another variation on this is to have the book keeper or accounting department called a client and say I m updating my cash flow forecast and I was wondering What we are doing here is we are asking questions of the client rather than making demands of the client. Yes it s true that when am I going to get paid? is a question but it s not in the same tone as the examples shared here. When Clients Are Truly In Arrears If you have a client that is getting out there at 120 days or more, perhaps it s time to get a little more aggressive on the collections process. The key is to remember is that you need to be making your collections an ongoing topic in your conversations with your clients. Not to the point that your overbearing or over anxious about getting paid, but just so that they understand that it is a priority of yours. That you are thinking about it. One of the things that we did in our practice was to have our office manager put the blame on the principles while asking for commitments on when a client would be giving us a check.

6 One of her favorite questions to ask was are you going to be able to pay your invoice or should we start accruing interest according to the contract? Now we all know that actually collecting the interest is another point altogether. However it does tend to get their attention and motivate them to pay your invoice. Just like the squeaky wheel that gets the grease, the top of mind vendor gets paid first. Something else to keep in mind is that your clients are going to pay the vendors that are asking for their money much sooner than the vendors that are not. If your client has six consultants to whom they owe money and you are the only one asking for payment, who do you think is going to get paid first? Bonus - Ask For Extended Terms On Vendor Payments Now that we ve accelerated the collections process to help with our cash flow we may want to decelerate our payment process. If you have the vendors such as blue printers or anybody who supplies you with a product or service, you have the right to ask for extended terms. Your blueprint company may have a standard practice of net 15, or net 30. But this does not mean that you can not ask for more favorable terms such as net 60. Especially if you are paying for reimbursable blueprinting. You do not want to pay for that blue printing to the vendor until you have been paid by your client. Conclusion Between accelerating your billing and collections process, and getting better terms on your accounts payable, you can make huge improvements to your cash flow situation. Now is the time to take a critical look at your billing processes and find ways to simplify your invoicing so you can bill your clients in a timely manner. About Base Builders Founded in 2002, Base Builders is the company that brings you innovative Practice and Project Management software solutions. Our goal is to simplify your operational management, increase project management effectiveness, improve profitability and enhance client relations. For more information about our products, please visit Base Builders, LLC 550 W Plumb Lane, Suite 520 Reno, NV Domestic (866) International +1 (775) Copyright 2009, Base Builders, LLC. All Rights Reserved.