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The Most Powerful Financial Insights for Engineering Consulting Firms

    

8 min read

Engineering Consulting Firms

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When leading an engineering consulting firm, it's only natural to want to focus on what you do best – helping businesses meet their design and construction needs.

Key Takeaways

 

However, you have to focus on managing the business, too, and your blueprint to successful business management can be found in the back office. 

6 Powerful Financial Management Tips for Engineering Leaders

1. Use Job Costing to Make Strategic Decisions

Is job costing the key to growing your engineering consulting firm?

Job costing is an essential financial management tool for several reasons. Most importantly, in engineering, job costing allows you to:

  • Know your true costs
  • Identify your most and least profitable clients
  • Make strategic pricing decisions

In a service-based business, your products are your people. As a result, it can be difficult to nail down your true cost of doing business because such a large portion of what you provide relies on labor-related expenses. For engineering consulting firms, direct labor is the labor a firm spends on each billable project [1].

Job costing paired with automated time tracking, however, enables you to more accurately distribute labor-related costs to specific jobs or clients. As a result, you create transparency with your cost of doing business, and this makes accurate job costing possible.

Read More: Why Every Service Business Needs Job Costing

Subsequently, you'll be able to use job costing to pull profit and loss statements by class (job, job type, client, client type, or service) to identify your most and least profitable clients. This will help you decide where to focus your marketing efforts (on your most profitable type of client) or identify ways to increase profitability on less-profitable jobs. 

Note that your most and least profitable clients aren't necessarily those that generate the most and least revenue respectively. You might be surprised to find that big fish clients tend to drain your most expensive resources (high-level employees). As a result, the revenue large clients generate can end up costing way more than the revenue produced by smaller projects.

Read More: The Importance Of Pricing For Profitability Of Your Business

Additionally, knowing your true costs will help you make better decisions when it comes to pricing your services. If your profit margins reveal that you're not as profitable as you would like to be, you can look at adjusting your prices or offering different pricing models that feature built-in profit margins. As a result, you'll stop guessing when it comes to prices and start pricing for profitability, instead. 

Gain the insights you need for smarter decision-making. Get Customized Pricing!

2. Keep Impeccable Records and Automate Manual Processes to Make It All Possible

You can't know your numbers or use them to make strategic decisions in your business if you don't keep impeccable records. This includes tracking and categorizing absolutely every expense – even those pennies that seem minor and unimportant because pennies can quickly add up to thousands of dollars. 

Filing receipts and tracking employee time manually, however, quickly become unwieldy tasks. This leads to oversights and inaccuracies that will ultimately compromise your financial data, rendering it not very useful. 

The numbers speak for themselves: 28% of U.S companies are increasing investments in technology and automation this year- with a focus on enhancing their systems, processes, and internal controls, according to a 2021 PWC study. [1]

👉 Your engineering consulting firm most likely has a field team that evaluates a new job site. How do you make sure these workers are utilized as much as possible? This type of complex margin is nearly impossible to track without the right data. [2]

To improve accuracy and efficiency, you must automate manual bookkeeping and accounting processes. Accounting software like QuickBooks® can carry the majority of the back office burden. 

Additionally, the software easily integrates with a variety of apps and other savvy tools that simplify other back-office tasks by digitizing receipts, streamlining reimbursements, automating receivables and payables, and tracking employee time – all while generating the financial reports you need to track your most important KPIs. 

3. Monitor and Forecast Cash Flow to Avoid Feast and Famine Cycles

You’ve heard it before- Cash Flow is the lifeblood of your business. 

Cash flow problems are one of the top reasons why businesses close. Unforeseen shortages can result in unpaid vendors, payroll challenges, and the inability to cover your nut. 

All businesses face cash flow challenges, and depending on what your engineering firm designs, you might be operating in a seasonal business cycle which can also lead to periods of feast and famine. Although it's common, seasonality in business can still lead to serious cash flow problems – especially if you're not prepared to deal with the financial ups and downs it causes. 

Read More: Seasonal Business Or Not- Cash Flow Can Get Muddy Fast

In addition to looking at your current cash flow report, which should use accurate and timely data to show you the current amount of money flowing into and out of your company's accounts, you should also be looking at a cash flow forecast. 

Although it's likely won't be 100% accurate, a cash flow forecast uses your company's historical financial data to predict what your cash flow will look like throughout the coming months. A forecast can help you identify and prepare for cash flow shortages and seasonal trends in your cash flow that could lead to periodic shortages or influxes in cash. 


"Your methodology - management accounting practices, and the fact that you understood my needs for the business, established the P&L the way that I needed to have it set up to run the business - was very beneficial to me. We were profitable the first month after GrowthForce, and I knew it because my accounts and books were clean. I could understand where the money was coming from and going to." 

- Joe Aikins, CEO JTAM Engineering

👉 Read more on how the freedom to focus on growth instead of managing an accounting department fueled profitability for this Engineering firm.


4. Be Clear About Payment Terms and Follow Through With Collecting

When you begin working with a new client, it's not only important to sell them on your firm's services, you should need to talk with them about your payment terms and expectations and their responsibilities.

While talking about repayment before you've even rendered services might seem like a delicate topic, it's actually good customer service that creates transparency and will improve your relationships with clients. Additionally, it'll help improve your receivables cycle by reducing days paid outstanding. 

If you're regularly coming up short on cash flow, you can also consider adjusting your repayment terms going forward. Changes that will improve cash flow include implementing automated invoicing and payment reminders, accepting electronic payments, offering early payment discounts, and requiring payment (or partial payment) upfront. 

5. Track Your Most Important KPIs for Goal-Oriented Management

The data collected in your back office can provide a wealth of financial insights that will help you make better decisions for your business. To get the most out of your financial data, however, you must know which numbers are important to track and understand what their changing trends mean to interpret and apply the information to the strategic decisions you make. 

The key performance indicators (KPIs) that are most important to your business will depend on the goals you've set for your company. In service-based businesses, like engineering consulting firms, some of the most important metrics to track include gross profit margins, break-even rate, labor utilization rate, and overhead rate. 

6. Don't Attempt to Do It All Yourself; Enlist the Experts, Instead

If you think trying to manage your back office by yourself will save you money, then think again. As the leader of your company, your time is much too valuable to be spent on bookkeeping and accounting tasks. You stand to receive a better ROI on your own time by spending it leading your business, advising your employees, and focusing on improving your business strategy. 

Additionally, as an expert in engineering (not in management accounting), you risk wasting time figuring out the best bookkeeping and accounting system. You also risk making mistakes that could be detrimental to your bottom line. 

Even if your company cannot yet afford to hire an entire financial department in-house, you can still access a team of experts by outsourcing your bookkeeping and accounting function. Look for a solid outsourced accounting services provider that provides complete services, acts as a trusted advisor, and considers itself to be your business partner. 

When you work with an outsourced accounting partner, you'll be able to leverage the ever-powerful combination of both team and technology – without worrying about wasting your resources. 

How Financial Insights Enable Proactive Business Leadership

Using financial insights in business leadership means the difference between seat-of-your-pants decision making and real leadership that relies on well-honed business acumen. 

Rather than leading your engineering consulting firm by reacting to challenges and opportunities, as they occur, relying on financial insights will help you sharpen your business acumen to be a proactive leader who foresees challenges and opportunities and plans accordingly. 

Read More: Cultivate Your Competitive Advantage with Better Business Acumen

With a solid financial management strategy, you can make data-driven decisions designed to strengthen your engineering business against seasonal revenue changes, economic recessions, and more. Plus, you can take steps now to ensure your company is in the right position financially to take advantage of new growth opportunities as they arise. 

Poor Financial Management Could Be Your Business's Downfall


[1]  https://www.pwc.com/us/en/library/ceo-agenda/ceo-survey.html 

[2] https://www.linkedin.com/pulse/15-crucial-financial-metrics-architectural-firms-dr-benjamin-coorey 

[2] https://info.aph.solutions/blog 

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