It is a perhaps surprising fact of business life that companies are more likely to fail due to mismanaging their cash flow, than because they are unprofitable. A 2017 study conducted by the US Bank National Association found that 82% of small businesses failed due to poor handling of their cash flow.
Neil Boyde, Chief Financial Officer at Grimshaw, does a 13-week cash flow forecast every week, without fail. He chooses this period because it is when the money coming in and money going out can be predicted with reasonable certainty.
Forecasting some three months ahead also ensures that, if any problems appear to be emerging in the third month, there is still two months in which to take action.
Boyde maintains a buffer of two to three months at Grimshaw, either as cash in the bank or as an agreed banking facility. He regards a two month buffer as a minimum.
"Payroll is the main outgoing for any professional services company, which is not a flexible cost," Boyde points out. "And there is a time lag for getting paid for work done."
"Architecture is not a business model where you can offset your cash outgoings against term payments to your suppliers, like a supermarket," he goes on. "Architects do not have that luxury, so cash flow forecasting is absolutely essential."
There is no great art to it, so there is no excuse for practices not to make cash flow forecasts on a regular, formal basis. The important thing is to be honest and recognise a problem or a declining trend in cash income for what it is.
"When you see the signs, you must be ready to have some hard conversations," Boyde advises. "If you are going to the bank, the earlier you go there for an honest meeting, the more likely it is to help."
It is probably also time for similar communication with clients. Architects are loath to upset a client, but Boyde stresses that no-one should ever hesitate to ask for money due for work done.
"Remember that it is their finance department you will be talking to and they are not going to get upset. They hear this stuff all the time."
However, while a client’s finance department might be thick-skinned, Boyde acknowledges that clients do get upset by getting a legal letter. Nevertheless, he stresses that if a payment issue cannot be resolved quickly, architects should not be reluctant to get a solicitor involved. Often that first letter is all it takes.
Boyde’s standard practice at Grimshaw is to email the client’s finance department a week in advance and ask for confirmation that an invoice will be paid on time.
"You don’t want to wait until payments are overdue because then you run the risk of some minor query over dates, terms, invoice numbers or whatever adding to delays. Asking for confirmation ahead of payment means any invoicing issues are flagged up and can be dealt with."
Architects should not overlook cash flow considerations when negotiating fees. It is all too easy to focus on agreeing the headline fee and lose sight of how much your business needs to bank and when. Cash flow and stage payments should not be an afterthought; they should be part of the main negotiation.
However, Boyde does not totally rule out taking on some work at risk. There are cases in which choosing to carry some risk may make sense, so long as it is in return for a greater reward.
The watchword here is ‘oversight’: senior management should be aware of risks the business is exposed to. What must be avoided is a situation where different people within a practice engage in separate ‘at risk’ arrangements, which can rapidly get out of control.
Thanks to Neil Boyde, Chief Financial Officer, Grimshaw Architects.
Text by Neal Morris. This is a Professional Feature edited by the RIBA Practice team. Send us your feedback and ideas
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Posted on 28 February 2019.