Architects & Engineers Articles -How to Keep Firm Finances in the ForefrontIt’s easy to keep firm finances on the back burner and stay focused on client matters. It’s even easier to do so if your firm has no assigned principal, office administrator or lead accountant in charge of this area. But no matter the size or age of your firm, effective financial management is essential to building and maintaining success. Monitoring Tools One key element of financial management is monitoring financial activity over specific time periods. Through monitoring, you can spot changes and trends in such areas as cash flow and asset and liability growth. This allows you to address financial problems before they become serious and to do what it takes to keep positive trends going. Here are some tools you can use to monitor your firm’s finances: Budget variance report. Compare estimated figures of how much you expected to spend and earn for the month with how much you actually spent and earned. The report should be set up with columns that include the amount you budgeted, the amount you spent or earned, the difference (in percentages) and an explanation for the difference. This will help you assess, for instance, if there are ways to reduce overhead, such as employee benefits or office space costs. Financial benchmarks. These include net and gross revenue, salaries, gross fees, net revenue per employee and realization. For example, a total debt to net fixed assets ratio can track trends in how efficiently you’re using debt to increase productivity, capacity and income. A work in progress (WIP) ratio tracks the company’s short term financial investment in client accounts (which should be converted into paid billings immediately to preserve the investment value) compared to the total WIP. Tracking this ratio over time can determine if your WIP is aging too long, which can help identify negative trends such as problem clients, poor collections or a procrastinating and weak project manager. It’s also critical to benchmark billable hours and rates, and monitor accounts receivable aging and accounts payable aging at least monthly. Having accounts slip past agreed-upon terms, on either accounts receivable aging and accounts payable aging, is usually a sign of trouble. Finding Hidden Revenue Another key element of financial management is making sure you’re taking advantage of any relatively easy ways to increase revenue. There are a number of places within your company where you may find additional dollars to add to the bottom line. For example, what’s your company’s ineffective multiplier rate and how does it compare to individual project performance? You can improve this figure by determining the reasons for project write-offs and devising a plan to eliminate them. And by implementing strategies to reduce collection write-offs, you can increase your collection realization rate, further increasing revenue. Another strategy is to enhance your company’s production efficiency or utilization. You can see a significant difference by adding just one billable and chargeable hour a day:
Other methods for increasing revenue include ensuring billing rates are competitive and clients are being billed for all applicable expenses; leveraging; asking clients for referrals; and reviewing and implementing marketing practices and cross-selling. Top of Mind Effective financial management doesn’t have to be a difficult or time-consuming task. But it is a responsibility that should be kept top of mind to ensure that your company is operating successfully. By implementing strategies, such as those discussed here, you can ensure your company is profitable for years to come. The Client Budget Something else you may want to consider to help ensure effective financial management is the client budget and work plan. Some firms choose not to establish a work plan once a profit is awarded; they believe that their proposal is their budget and they won’t vary. Others don’t want to restrict themselves to a set fee or take the time to plan future firm resources. But preparing a budget at the onset of a project can offer several benefits, such as greater productivity, efficiency and cost effectiveness for both you and your client because it helps to manage time, costs and expectations. And including budget information that clearly addresses activities, milestones, resources, scope and costs in each contract lets your clients know what to expect before the service begins, potentially avoiding misunderstandings and delayed payments later. Knowing the client’s expectations — from strategies to outcomes — is essential to determine the time and money you’ll need to invest in the project. Determine how many hours it will take — and build in a little extra — to service the client. Unless you’re dealing with stringent deadlines, the client is likely to be less concerned with detailed timelines and more concerned with results. Budgeting should be a joint effort between you (sales and technical staff) and your client. Be sure to keep the lines of communication open to ensure that new developments that may affect the budget are conveyed. Keeping the principal involved and reviewing the budget regularly helps keep the client on target and ensure that both your firm’s and your client’s goals are being met. Find out how our expertise in accounting for architects and engineers can add value to your business. Email us or call us at 1 (888) 875-9770. related linksPODCAST: Overhead Rates, State Agency Updates and Best Practices for Engineers |
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