AE Firm Financial Management: Critical Now and Always

September 9 2021 | by Brad Wilson, CMA, CDA, MBA

A key component of any successful AE firm is a well-oiled accounting function. Yet, this critical function is often deemed non-essential to the success of a firm. Firms want to be more profitable and drive growth, but they overlook accounting as an area that can significantly contribute to those goals.

The opinion that accountants, bookkeepers, controllers, and even CFOs are necessary overhead usually shifts when the business finds itself in a situation where the effectiveness of a firm’s financial management can make the difference between the business surviving or folding. For some, the pandemic and its aftermath have been one of those times.

Engineers and Accountants

You may have heard the industry joke that the most significant difference between engineers and accountants is that accountants will admit they can’t do engineering. Even for those AE firm principals with some accounting background or acquired skill, it’s safe to say that’s not the best use of their time.

You don’t focus on learning how to put out grease fires when you’re taking a cooking class—you enjoy acquiring new skills, knowing you’ve got a fire extinguisher under the sink. But when the stove erupts in flames, and you realize the extinguisher you haven’t tested in decades is no longer operational due to lack of use, now a bad situation has gotten much worse. That, in a highly dramatized nutshell, is often the relationship between firms and their accounting staff.

What You Should Be Doing Now

Proactive financial management should be one of the primary functions of your AE firm. When it comes to your performance in good times or your survival in difficult times, it’s no less critical than landing new work or completing projects. That’s especially true for smaller firms with smaller margins who and are perpetually close to the edge of a dangerous financial cliff, even if they don’t always know it.

With the AE industry enjoying years of prosperity, many firms got by with minimal time or effort devoted to their finances and often experienced double-digit growth simply as a result of the steadily rising economy. Now, things are a bit different, and firms are taking a closer look at their balance sheet. What they see there is directly correlated to the answers to some key financial questions.

  1. Have you taken steps to improve the way you manage accounts receivable?
  2. Have you implemented automated billing processes to help you manage WIP?
  3. Have you developed strong relationships with your subconsultants that will enhance the handling of accounts payable?
  4. Have you worked with your bank to ensure you’re managing your debt correctly?

If you answer “No” to these questions, then there may be some costly mistakes happening. The good news is that there are opportunities to correct and change course towards greater profitability and success.

Tactics for Improving Your Financial Management

If you haven’t given financial management the love it deserves recently (or ever), here are some steps you can take now to try to steady the ship during this economic storm:

  1. Concentrate on generating cash. Assess projects to determine which ones can generate the most revenue generation. Focus staff on those jobs and be ready to bill them; your invoices are as important as any other deliverable you send to clients!
  2. Offer discounts for fast payment. Payment discounts can be painful, but they can help get cash promptly. Talk with your clients about what you’re considering and explain that their prompt payment will help you help them.
  3. Talk with your subconsultants and the firms you are teaming with about their next round of invoices and your firm’s cash flow projections. Working more effectively with them can ensure that everyone gets paid on time.
  4. Ask your banker how they can help you. There are many SBA programs available, but to leverage these programs effectively, you need to have a clear picture of how much capital you need, why you need it, and how long you need it.
  5. Take a fresh look at your project and profitability management software. Your project managers need a system that enables them to work efficiently and collaborate with accounting more effectively regarding revenue forecasting, prompt and accurate invoicing, managing WIP, and providing real-time, actionable intel on the firm’s financial standing.

The Case for Effective Financial Management Becomes Clear

If the tasks above and all the work required to complete them seems daunting, it’s probably becoming more apparent to you how vital effective financial management is. Fortunately, the steps you take now, the improved financial management practices you put in place from now on, and any upgrades you make to your financial management systems will benefit your firm in good economic times and bad.

A skilled and experienced financial management professional or team, and the tools to support them, are essential assets to any AE firm, not simply when a crisis arises. Join us for our upcoming webinar, where we’ll discuss the most common accounting mistakes that AE firms make and steps to avoid them. Don’t miss this opportunity to learn how better accounting and financial management can turn a good firm into a great one.

 


Brad Wilson, CMA, CDA | Stambaugh Ness

Brad Wilson, CMA, CDA, MBA | Director, AE Consulting

Brad’s 30+ year career spent working with architecture and engineering (AE) firms includes his most recent role as Partner with TWO CPAs & Consultants, Inc., as well as being a Consultant with PSMJ Resources for 17 years. Additionally, after serving as an outsourced CFO and controller for numerous firms, Brad has deep firsthand knowledge of how to develop and execute successful finance and accounting practices in the AE industry.

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