The amount of work and stress that firm owners endure starting and running an architecture or engineering firm deserves financial rewards. Too often firms get by month to month without seeing significant profits. Revenue come in and is quickly used to cover outstanding expenses. Firm owners see their bank account balances rise and fall but rarely have enough to take out of the business as profit.
An invoice gets paid and you are pleasantly surprised by how much money is in your bank account. But then you start paying your bills, paying your consultants, and investing in business activities and you ask yourself “Where is all my money going?" Why don't I have a balance that I can take out as profit?
If money seems to always leak out of your bank account like water flowing through a sieve, here are five ideas to help you solve the mystery of your firm’s disappearing money.
1. Budgeting: A Business Owner’s Best Friend
Maybe you’re one of the lucky business owners who don’t have to worry about balancing your checkbook. Your business is so flush with cash, there’s never a doubt that there’s enough money in your bank account to cover the purchase you’re about to make.
But that isn't a typical story for small businesses - especially A&E firms that operate on tight margins. This is where budgeting comes in. Business owners hate the word "budget" just as much as the word “taxes”. It’s annoying. It’s tedious. It's time consuming. Yet, it can also lead to a dramatic increase in the financial health of your firm. It is important that you take the time to build a budget for your business. I typically work with firms to build budgets in December for the upcoming year, and then tracking the budget vs actuals on a quarterly basis.
The concept behind budgeting is this – give every dollar that comes into your business a job. Your budget is where you set your business priorities. Together with your leadership team you decide where to invest in order to get a strong return. You allocate your projected revenue into the things you need to operate your business effectively and profitably. This includes planning for all operating expenses, tax payments, and yes, plan for profit.
You don’t have to do this yourself – delegate it to your office manager or controller, or someone with a knack for understanding numbers. They can build a draft budget that you then review or discuss with a financial leadership committee.
2. Accept Electronic Funds Transfer (EFT) and Credit Card Payments
Accrual accounting - where you look at your financial reports based on invoices sent and received - is the right way to assess a firm's performance in terms of work done compared to revenue produced. But this doesn't reflect that cashflow of the business. Accrual accounting may show profit on paper, but that doesn't mean you have the money in the bank account.
Often you are waiting to get paid by your clients and although the P&L shows a profit, that money has not been collected. This is one of the reasons your bank account may not reflect the actual success of your business. It is also why you should also review balance sheets and Accounts Receivable reports as part of your monthly financial analysis.
Solving cashflow issues, and keeping your Accounts Recievable to a reasonable level is imperative to running a successful firm that rewards you for your hard work and the risk you take on as a business owner. And one of the best ways to address cashflow is to make it easy for your clients to pay you quickly.
All firms should be sending electronic invoices that offer e-payment options. You should accept ACH or even Credit Card payments as the default payment options. And you should reward clients for paying quickly (either by offering a small discount if invoices are paid within 5 business days, or imposing a penalty if invoices are paid late, or both). For the firms that use BQE CORE for billing, firms that offer e-payment options get paid over 30% faster. Meaning the money shows up in their accounts faster.
Maybe you can’t completely get rid of checks as a form of payment from all of your customers, but you should at least offer them an easier way to pay, hoping that they pay electronically rather than mail you a check. Paper checks are slow and are another step in the money-tracking process where something can go wrong or get delayed. Start moving away from paper invoices and checks so you can collect your revenue faster.
3. Proper Segregation of Duties
Trust – but verify – those employees who have access to your cash. Whether it’s a company credit card or dipping into your petty cash account, make sure expenses get pre-approved and receipts get immediately turned in. And the same people who have access to your cash or credit cards should never be the same people that are responsible for reconciling your bank accounts.
This point is really about carefully monitoring expenses. It is too easy for expenses to expand as revenue increases. Rather than increasing revenue corresponding to increased profits, many firms see their expenses grow proportionately, thus eating up and profit. Growth for growth's sake is not good for your business unless you can convert revenue growth into increased profits.
Keep tabs on expenses. Look for ways to cut back in areas you don't need to spend money. Be efficient when making purchases of supplies, review your software stack to make sure you are not paying for unnecessary subscriptions, audit your insurance policy, and look for other ways to cut back on expenses. Bootstrapping your business can lead to significantly higher profits.
4. Look at Your Bank Reconciliation
You’ve got a big business now. You can’t do everything yourself. That’s why you hired someone to take care of your firm’s bookkeeping. What’s the one thing, though, that you should never delegate? Looking over your bank account’s reconciliation report. Notice I didn’t say you had to do the reconciliation yourself. This can still be done by your bookkeeper or accountant. But you should absolutely look over the reconciliation report prepared by your accountant on a monthly basis as a bare minimum.
Ask questions if you don’t understand a transaction or if something looks out of place. When I was running my firm I would typically look through our business expenses on a weekly basis to track what we were spending. If anything looked off I'd ask our bookkeeper for more information, or ask the person that filed the expense. Keep tabs on who is spending what, and make sure you communicate with your team so they help keep business expenses to a minimum.
5. Profit First
Another good strategy is to set up multiple accounts that you use to separate revenue into buckets that are then used for different purposes. Rather than keep all revenue in one account and using this account for operating expenses, taxes, and profit distributions, try having three accounts instead.
All revenue is deposited into the first account and you or your bookkeeper immediately diverts a percentage of the deposit into the second account (used for tax payments) and the third account (used for profit). By taking out a percentage of your revenue right away, and earmarking it for taxes and profit, you will start making smarter business decisions when it comes to operating expenses. You will see less money is available and you won't use the cash that should be left over for profits to make purchases or waste on unnecessary expenses.
This also makes it easy to visualize your profits right away. you can see the account balance in your Profit bank account grow rather than it be a hidden line on a report or spreadsheet. Seeing this balance grow is gratifying and helps build better financial habits. But it is of vital importance that you don't cheap yourself. Don't take out money from the taxes or profit accounts to cover business expenses. If you can't cover expenses from your operations account then you need to cut expenses, not steal money from the other accounts. It may mean drastically reducing software, moving to cheaper office, or even laying off someone that you can't afford, but you have to figure out how to run the business with the revenue left in the operations account only.
This strategy is discussed in more detail in the book Profit First by Mike Michalowicz.
Integrated Firm Management and Financial Management Software Can Help
Integrated firm management platforms such as BQE CORE can help you achieve your financial goals by making your data more transparent. Visualizing your financial data by project or firm-wide lets you see where you stand, where your money is coming from, and where it is going. Transparency will help you and your team make better decisions and ultimately improve your business' financial performance.
You can also use features of this software to automate tasks such as financial reporting, and build a cadence where you review your firm's finances and cash flow on a regular basis. This will help you implement the processes and habits we discussed above.
BQE Software offers intelligent project management and billing solutions for professional services industry that are designed to help increase performance and productivity through streamlined processes and integration. Designed by and architect and engineer to serve the A&E industry, this software can help you with the administrative tasks of your business opening up more time to focus on the work that you love.
