Improving financial management

An experienced and competent financial manager could make a huge difference in your company’s and your personal financial well-being.

After 41 years of working in and around A/E firms, it has become increasingly apparent that many are behind in terms of financial management. In fact, making improvements in this area is too often easier said than done. Why is that?

There are several reasons. Three standouts are worth mentioning, however. First and foremost – it used to be conventional wisdom that if you went into this business you could make a decent living but wouldn’t ever make a great living out of it. While that may still be true for many firm owners (and especially smaller ones), it certainly doesn’t have to be the case. I personally know many people who make seven figure annual incomes from their A/E firm ownership and employment, and have done so in some cases for decades. While that opportunity DOES exist, the problem is if you don’t THINK you can do really well in this business, odds are that is not going to happen. So why even try? Whatever happens will happen, and no improvements in financial management will make a big difference in the results. As Henry Ford once said, “Whether you think you can or think you can’t, you’re right.”

Secondly, you have to consider the evolution of the top financial management role in the typical A/E firm. Firms usually start out with one or two professionals deciding to hang out a shingle. At first, the firm founder (or one of the founders) takes on the role of accounting and billing and bill-paying. Then some sort of admin person is hired. This person may answer the phone and do clerical work, and he or she eventually assumes the role of bill-paying. Next, this individual either becomes a full-time bookkeeper or one is hired. Eventually, he or she either assumes all business functions for the firm – or a degreed accountant is hired for that role. And if the firm continues to grow beyond this stage, only then will they probably add a real CFO to the team, and that person will probably come from another firm that isn’t as large or successful as the one they are joining. In this scenario, where do new ideas and processes and tactics come from to significantly improve cash flow or improve profitability, or where does new thinking about capitalization and ownership structure come into the picture? It probably doesn’t, as we are too inbred and likely to perpetuate less-than-optimal thinking about financial management.

Third, some firm principals just don’t allow the top financial person to actually do their job. They are slow to turn in timesheets or expense reports, so financial management cannot bill. These same principals don’t respond to requests for information about contracts or billing so that, too, slows things down. Financial managers typically have little say about who the firm actually works for, and slow-paying clients continue to be served because “principal X” has a relationship with someone in the client organization that trumps good business practices. And then on top of it, because the top financial person is not typically an architect or engineer, or someone who came from a line function in the firm, he or she may be denied a seat at the board table, or top management table, or may not be allowed to become a principal. So this person’s voice isn’t heard and their influence is limited.

It is because of these reasons that really outstanding financial management practices that could make a huge difference in the company’s financial performance often cannot take hold.

You might now ask yourself, what would those areas of improvement be? Here are a few of them that in my experience are often fruitful for financial management to focus on:

1. Contracts and credit policies. Getting someone who knows what they are doing to read these things and help formulate billing milestones and weigh in on the credit worthiness of any given client can be super helpful.
2. Billing and collection. Sure, we may have average collection periods of 70-80 days or more in most firms in this business but that doesn’t mean it is the best one can do. I have seen A/E firms – even relatively large ones with 400-500 employees or more that work for a broad range of clients – get their average collection periods down as low as 40 days. It IS possible. It won’t be if you do everything as you always have done it, however.
3. Pricing. Contract forms, regularly raising hourly billing rates and fees, making sure markups are allowed and applied for all reimbursable expenses, and much more related to pricing are all areas where competent financial management can help out.
4. Financial reporting and forecasting. Having clear reports that anyone can understand and that show trends is something a really good financial manager can do for a firm. And better yet, forecasting future performance in terms of profit or loss and cashflow is something a competent financial manager can do, and a common weakness in firms in this business.
5. Banking and credit. Making sure the company has the best and most credit available to it should they need it is typically a role for a strong financial manager. And getting the principals out of personal guarantees or at least limiting those is something that can also be accomplished.
6. Ownership transition. Modeling the current ownership structure in terms of valuation and forecasting the effects of departing or incoming shareholders on the capital structure of the firm is a critical function that a strong financial manager can provide. As critical as this is, it is too often ignored.
7. Mergers and acquisitions. A good financial manager can help with due diligence, deal structuring, finding consolidation cost savings, financing, and so much more for those companies that want to grow by merger or acquisition. The input of the top financial person on the company is invaluable here.

Hopefully, if you are a firm principal, by the time you finish this article, you can see some of the ways an experienced and competent financial manager could make a huge difference in your company’s and your personal financial well-being. So what are you waiting for?

Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com.