AEC firms can weather the next downturn or disruption by building financial, contractual, and operational protections before the storm arrives.
Like enterprising merchants for centuries before us, we AEC professionals seek to provide something of value to a market in need. That might have once been wood, iron, or spice traded across seas to distant shores. Today, these commodities are our technical expertise, and our experience. The world is smaller; we ply our trade from 27-inch monitors, spreadsheets, and smartphones rather than clipper ships and cargo wharves.
But storms still happen.
We rarely know when crises will impact us; we only know that they will occur. Burst market bubbles, pandemics, or geopolitical disruptions are our modern-day storms. And the history of global commerce is strewn with the wreckage of businesses that failed to protect themselves – and foundered. By contrast, businesses that remembered to scan the horizon and anticipate storms, plan for their effects, and build the necessary protections have survived when the rain eventually stopped and the winds abated.
What financial resilience looks like for AEC firms
What does this kind of “safe harbor” look like today? Amid so much insurance, financial planning, and data backup options, it’s often difficult to distinguish true protection from fear-driven salesmanship. My advice has always been the same: Don’t start by seeking answers from those looking to sell you protection. Instead, find the most experienced AEC professional you know, and ask them the following:
- In the past 20 or 30 years, what two or three external events were the most impactful to your business?
- If you were given the chance to plan for only one crisis, what would it be?
Many of us have been partners or officers in start-up firms, and have faced the very difficult choice of allocating costs in the direction of risk, or in the direction of security. Too much protection through overinsurance or accumulated cash can stifle early momentum, when investment in expertise and reputation is critical. Yet we must build a safe harbor early, when we are the most vulnerable.
What one bad client taught us about financial risk
My experience in helping to grow a startup environmental consulting firm in the early 2000s taught me this lesson the hard way. Within two months we won a large due diligence project involving hundreds of acres for an aspiring warehouse developer. We hadn’t yet built any appreciable cash reserve so our operational costs were being drawn from a quickly-shrinking line of credit. In our naïve excitement we asked only for a nominal up-front retainer – $15,000 of a planned $200,000 project fee – confident that our relationship with this client and our resulting cash flow would endure.
Neither was true. After billing beyond the retainer, we continued with our work and accrued $80,000 in professional fees before the client quite literally disappeared. Cellphones disconnected; email accounts closed. When we pursued payment in person, we found their “headquarters office” – a modular office trailer – deserted. Our exciting new client had, in fact, been a con artist who had taken their investor’s money and fled without paying any subcontractors. After some uncomfortable meetings with our bank, and thanks mostly to steadier work for a few key, respectable clients, we managed to stay afloat – barely – and were wiser for the experience.
How AEC firms can build stronger protections before a crisis
The harsh lessons we learned included the truth that an early cash reserve can be a lifesaver. But it also doesn’t need to be in the millions, provided that other protections are being built in the form of adequate retainers, client vetting, and solid contract terms. With these, an early cash reserve can be set at a very achievable three to six months of your operating costs, and AEC firm owners must have the discipline to scale this reserve up as the firm’s payroll and revenue grows. From there, seek to build further protections even as you set your sails and venture forth:
- Deepen and shield your harbor with diversified investments from your cash reserves as they grow.
- Build stronger ships through favorable contract terms, with the aid of trusted attorneys, that will protect your daily trade.
- Sail fast by placing an emphasis on technical excellence. Recruit well and train often, and remember that the best ships are crewed by the smartest sailors.
- Trade in more than one good to weather the economic shifts that will inevitably occur; diversify your revenue with new services as soon as possible in the early phases of your growth.
Like any seaworthy captain, have the discipline as a business leader to build and maintain your fleet’s protections no matter what enticing visions appear on the horizon. What kind of harbor have you built?
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David Coyne is a retired COO of an environmental consulting and engineering firm. Coyne can be reached at dcoyne.dc@gmail.com. |
