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Executive Corner: Three Critical Actions Will Help Your Firm Survive … and Thrive

Carl von Hake on June 29, 2020 - in Articles, Column

In 2008, I had just taken a position with a large, international engineering firm as chief financial officer. The firm was coming off a good run of profitable years, solid cash flow and expansion into new markets, but it was starting to feel the strain as the world’s financial markets were deteriorating. Before the Great Financial Crisis finally ended, more than 65 percent of the firm’s revenue flow had evaporated, and, more troubling, the firm’s cash position had dwindled to perilous levels.

What saved the day for us were intentional and proactive measures that shored up our cash position and prepared us for the economic rebound that followed. The following are some actions you can take right now in three critical areas that will help your firm not only survive the current economic storm but also thrive in the economy that will emerge.

Cash Flow 

Among other things, the Great Financial Crisis reminded 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’re 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 future billings and the timing of their collection as well as the collection of current accounts receivable. Add to that a conservative estimate of your usual overhead and payroll expenses—and any other cash items such as payments on debt you have, additions to debt, taxes and capital expenditures—and you have most, if not all, of the components of your cash flow.  

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

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

Credit Capacity

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 see you through difficult times. How quickly you would like to access this cash, which in some cases may be the same day, will dictate which source(s) you use: bank line of credit, short- 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 as well as establish credit. If you already have established credit, consider asking your lender to review your credit capacity and ask if they’re 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.

Cost Control

When times are good in the design business (or 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 spending to identify things that the elimination or reduction of wouldn’t jeopardize current or future operations. Because time is valuable, I caution against trying to save money by cutting back on low-impact line items that won’t move the needle enough. Instead, I suggest focusing on two areas that can have a significant impact on 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 doesn’t add to your firm’s bottom-line profitability or another service area’s profitability. For example, let’s say you’re 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 local developer work is consistently unprofitable. Perhaps you should consider discontinuing that type of work or re-engineering your pricing and delivery method so it can be profitable. 

Likewise, if you have staff members who consistently under-perform, now would be the ideal time to release them to industry—as difficult as that may be—and evaluate whether they should be replaced later or not at all. Remember, it’s highly likely that unproductive time (i.e., 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 any staff reductions don’t negatively impact your compliance with Paycheck Protection Program covenants. 

Winston Churchill said, “Never let a good crisis go to waste.” Taking proactive steps should position your firm to weather this current economic crisis and flourish as the economy rebounds.

 

Carl von Hake

About Carl von Hake

Carl von Hake, CPA, is an associate principal at Rusk O’Brien Gido + Partners, specializing in corporate financial advisory services; email: cvonhake@rog-partners.com.

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