Architects: Smoothing out the cash flow rollercoaster

Cash flow planning is key to the success of all businesses. While a business may appear to be profitable on paper, cash flow can be a serious challenge for professional services firms.
This is even more important in the growth phase of a business. Investment in growth needs to be planned around the day-to-day working capital requirements to avoid running into a liquidity meltdown.

Based on our experience of working with architects, we know that cash flow is even more of a challenge compared to many other businesses. The long-term nature of projects makes this a particular struggle as cash becomes tied up in ‘work in progress’. So, how can you anticipate your cash flow needs?
  1. Regular forecasting – Forecasts should be updated regularly based on discussions with the project leads to account for new information e.g. new projects won, any projects that go on hold, increases to expected costs etc. The forecast can be manipulated with different assumptions to present a best and worst case picture. One of our clients has always maintained three forecasts in readiness for any eventuality: a realistic forecast, an aspirational one and an Armageddon one!
  2. Planning ahead – for known cash flow crunch points; for example VAT, tax and staff bonuses, ensure cash reserves are topped up and that there is an emergency access point such as an overdraft facility.
  3. Up-to-date accounting information – if the bookkeeping records are kept up-to-date it is easier to analyse the current cash position, profitability of the firm and compare actual vs. budget on a real time basis. As we all know, profit doesn’t always equal cash.
  4. Accurate time recording – the majority of practices now use bespoke project software which aids the recording of time and reimbursable expenses on a project by project basis. Encourage all staff to record their time as accurately as possible and on a timely basis. This will allow you to track whether projects are on budget and agree any additional fees up-front.
  5. Billing upfront – try to request an initial payment prior to starting a project. Carefully plan and schedule billing dates for the remainder of the project. Also, ensure your credit terms are in sync with the credit terms set by your suppliers to avoid a negative cash flow build up over time.
  6. Strong credit control – review ‘debtor days’ on a regular basis to determine how long your clients are taking to pay you. You should strive for fewer than 60 days. Anything greater than 90 days is cause for concern. Any potential bad debts should be chased swiftly before they become irrecoverable.
If you would like any support or assistance in preparing cash flow forecasts, management accounts or reviewing your financial data please get in touch.

Claire Watkins
Partner, Head of Professional Practices Group
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T | +44 (0)20 7556 1482
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