Financial Management 101
Oct 01, 2007
As the market softens a bit and collections are starting to stretch out, more firms are moving a little deeper into their lines of credit. That always raises the stress level for everyone in the business— as it should. The business risk is undoubtedly increased as liquidity declines and debt goes up.
During times like these, I want to grab the firm’s CFO and ask, “Why did you let this happen?” So much more should be within our control IF the priorities are straight and IF the person in the top financial role has the knowledge necessary to do the job.
I hate stress. And stress comes from not having control over the financial aspects of your business. So naturally, I do everything I can to avoid it. Here’s my “financial management 101” for A/E/P and environmental firms:
Do a cash flow projection. Then do another one, and another one, and another one. Make it a habit to look forward and see what your cash and borrowing positions are going to be if things turn out like you think they will. Take action based on the problems that you see brewing out there on the horizon.
Do an earnings projection. Are you going to be profitable this month? How about next month? The month after that? This year? If you cannot answer these questions, you are not doing what you need to do. Sound the alarm and solve the earnings problem before it’s too late to fix it.
Get as much credit as you can BEFORE you need it. Firms get in trouble cash-wise and then find out they don’t have adequate credit to get them through because they are not planning ahead. I always thought it was best to get the biggest credit line you can get. I also think it’s a sensible idea to have more than one bank that you do business with. That way, if one bank threatens to cut you off, you have somewhere else to go where they know you. It’s the CFO’s job to deal with banks and banking relationships.
Pay your owners a little less. Whenever you start getting worried about the financial condition of the business, it’s time to take a hard look and cut all unnecessary expenditures. Many firms got a little too fat in terms of what they pay their owners during these good times that we’ve all enjoyed over the past decade. Owners’ pay should be something you take a look it. If the CFO cannot point this out, who can? And they’ll get any cut they’ve taken back if the company is as profitable as it should be, right?
Educate your people about the financial aspects of an A/E/P or environmental firm. They need to know this stuff IF they are going to do the right thing. Most design professionals have a very poor understanding of financial and accounting stuff. Heck, most people with BUSINESS degrees are weak in this department. The top financial person in the firm must always work on this problem.
The bottom line is the CFO can do a lot— as much as anyone else— to steer the firm to calmer financial waters. Those who take the role seriously are invaluable contributors to the company’s success.
Originally published 10/01/2007
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