Architectural, engineering and construction (AEC) firms are designing, planning, constructing and leading projects worth hundreds of millions of dollars. These firms provide professional services that impact the quality and success of those projects. There is a public misconception that these types of businesses are highly profitable, but that is not always true. Some AEC firms maintain a decent profit margin, while many others struggle financially.
There are many reasons why AEC firms are not profitable enough, but one main reason is poor financial management. Strategic financial management is essential for any business to be successful and sustainable. Strategically managed finances can result in a great success story or in a fatal nightmare if finances are not controlled.
Architects, engineers and construction professionals do not get much business education relative to running a business while working on their professional degrees. And that is one of the major challenges these professionals face in running their business.
Slow paying clients are one major challenge in the AEC industry in today’s economy. The problem of not being paid on time is a very serious issue for small and large firms. The issue is exacerbated because it is occurring when AEC firms are having significant difficulty staffing up to meet demands of their existing and new clients.
Strategic thinking is critical to determine what strategies need to be considered for financial profitability. Strategies are needed to diversify clients and professional services to ensure a stable flow of income for firm growth and pricing projects accordingly.
Working capital is a problem that many people in business do not understand and AEC firms need much more focus and education to deal with it. Wikipedia defines working capital as current assets less current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit and negative working capital.
Positive working capital is required so an AEC firm is able to continue its operations and also have sufficient funds to satisfy short-term debt and ongoing operational expenses. An AEC firm’s current assets typically include accounts receivable. However, in reality that is not true if clients take a year to pay their bills.
AEC firms must have enough cash to keep meeting payroll and all other overhead expenses for the time it takes clients to pay their bills for work performed by their firms. AEC firms must stop tolerating slow-paying clients and acting as a bank to finance their clients’ businesses and projects.
Strategies that AEC firms must incorporate into their planning include: pursuing specific vertical markets and project types that are “recession resilient;” strategic focus on “Go – No Go” decisions on clients and projects; considering diversified business relationships and developing new strategic partnerships with other firms.
Strong financial management deploys tools to achieve success. Some of those tools include:
A management strategy for the direction of the firm. A forward look at the next quarter and the rest of the fiscal year, the next year, the next 2-3 years are important to determine that direction. The firm needs to set aside time to review and reflect on current workload and backlog, prospects in the pipeline, capacity to handle increased workload, any new skills or services needed, project management models, existing and desired clients, market trends, overall goals for the firm and other factors anticipated to impact the AEC industry.
Agility and adaptability are two key words for the future in the AEC world. The pandemic certainly highlighted the need for each of those attributes. A successful AEC firm must be able to adapt to changes in the industry, the economy, markets and unforeseen influences that will impact their business.
Business development is another critical tool for success in AEC firms. A firm cannot simply rely on work coming to them unsolicited and without strong ongoing relationships. Business development is a full-time task and is a “contact sport” that requires time to build and enhance relationships, research markets and forecasts, identify and qualify opportunities and work with the team to secure contracts and keep in touch periodically with clients during current projects.
Another very critical tool relates to developing strategic and realistic pricing of professional services. There are not many resources available to help guide a person in the development of professional fees. The truth is that development of these fees is a combination of an art and a science and this skill is developed over time.
Developing options to acquire working capital is also an important tool. One option is to secure a line-of-credit. Credit lines have been used by businesses for years to meet working capital needs. This resource provides a flexible loan from a financial institution that defines a specific amount of money the firm can access as needed and repay either immediately or over time. Lines of credit are often used to cover the gaps in irregular monthly cash flow or to finance a special purchase where it may be difficult to ascertain the exact funds needed in advance.
AEC firms are some of the most complicated businesses to manage. Success requires a strategic thinking high level person that understands both the design process and the financial management process to oversee financial performance.
Some important action items needed for strategic financial management include:
- Price: Learn from past experience to determine how many hours were spent on similar projects.
- Monitor: Regularly monitor projects’ profitability.
- Forecast: Obtain accurate projections for the firm’s projects and regularly review them.
- Allocate: Allocate staff and resources according to projections.
- Process: Create financial processes to support financial management, including project management, billing, change orders, collection, etc.
- Focus: Do not micro-manage. Focus on what makes a difference and helps meet financial objectives.
Closing with great advice from George Washington: “To contract new debts is not the way to pay old ones.”
Glenn Ebersole is a registered professional engineer and the Director of Business Development at JL Architects, a nationally licensed commercial architecture firm based in West Chester. He can be contacted by [email protected] or 717-575-8572.