Running a successful architecture or engineering (AE) firm has become more challenging since the economic slowdown of the last six years. Prior to 2007, work was easier to get, and one of the biggest problems was finding qualified and experienced staff to manage projects. Today, work is more competitive, and while there is an abundance of experienced project managers (PMs) available, it is still difficult to find PMs that are good at delivering projects profitably.
Many small firms have adopted bad habits that limit their ability to maximize profits. I have identified 10 mistakes, that when corrected, can lead to increased project profit margins, as well as position a firm to be more competitive.
10. Time Management
As a services firm, your employees’ time is what you sell for a living. Bad time management practices, including not enforcing strict time entry policies, has a negative effect on almost every aspect of the business. Improving timesheet accuracy will improve billing, cash flow, project reporting, and ultimately, project profitability.
9. Accrual Accounting
Most small AE firms are running their books on a cash basis. While this might help you with your taxes and cash flow, it does not provide a true picture of how the firm is really performing. By including accounts receivable (AR) and account payable (AP) in your income statement, you will get a much more accurate calculation of true profitability, and be better able to analyze the firm’s performance.
8. Accounting Expertise
Being in business has inherent risk, and having an experienced accountant available to help make business decisions is advisable. A good accountant can save you money in dealing with banks, negotiating contracts, and avoiding human resources (HR), tax, and legal problems.
7. Cash Flow
It is critical for a small firm to manage cash flow in order to prepare for the potential highs and lows of cash coming in from month to month. Having a line of credit with the bank, good billing and collections efforts, and even the way that contracts are written can impact cash flow. I recommend getting into the practice of forecasting cash receipts and requirements so that potential cash shortages can be dealt with in advance.
6. Sharing Financial Data
Many AE business owners keep information closely protected and are apprehensive about sharing financial data with project managers. If PMs don’t get the information they need to make educated decisions on their projects, they are handicapped and project profit margins may be reduced.
5. Training Project Managers
Most project managers never receive the training they need in order to be effective at their jobs. PMs are expected to handle dozens of aspects of the firm management and operations including resource management, time approvals, billing, collections, as well as estimating and budgeting their projects. Yet they rarely get training on all of these areas and can struggle with many aspects of their positions.
4. Antiquated Systems
I still run across many firms that are using software developed in the 90’s. These systems are not taking advantage of newer technology, and give the firm a competitive disadvantage. Viewing technology as a strategic advantage can help to focus resources where they are best able to help in the areas of marketing success, project profitability and maximizing staff utilization.
3. Preparing for Transition
Most ownership transition experts say that it takes about ten years to effectively finance a sale of the firm’s stock to its employees, yet many business owners wait until they are a couple years away from retiring, and then they are unsuccessful at being able to make it happen when they want. This can delay retirement, or force the business owner to sell the company before they are ready.
2. Spending on Marketing
When the economy declined and projects were scarce, marketing was the first major expense to be cut. This can have a profound effect on the future success of a firm, and their ability to recover quickly when opportunities are more plentiful. The fastest-growing firms are spending more on marketing than the average, and actually, increase marketing expenditure during tighter economic conditions.
1. Embracing Change
Change is tough, and AE firms are slower than most professional services businesses at adapting and improving their business management practices. Constant improvement is necessary to growth, and the best firms are finding ways to be more competitive, and leverage technology to cut costs and improve efficiencies.
All large firms started as small firms, and whether you are trying to grow organically, or build the firm for later acquisition, it is critical to work on correcting the typical mistakes that hold A&E firms back. Improving your accounting and project management practices, and investing in marketing and systems can launch you into the top 10% of the fastest growing and most successful AE firms.
This post was written by President & Chief Executive Officer of AEC Business Solutions, June R. Jewell, CPA.