Top Cash Flow Tips for Architecture Firms

9 min read

May 17th, 2024

Cash flow optimization is essential to the survival, growth, and success of every business. Healthy cash flow is so vital to business operations that mismanaged cash flow is the top reason businesses fail, according to the United States Chamber of Commerce.

Your cash flow is the lifeblood of your business and represents your ability to operate smoothly while generating a profit. In the architecture industry, businesses face unique challenges that can complicate cash flow management. 

So, business leaders in architecture firms must develop and implement strategies for managing and improving cash flow, as a part of the business's broader financial management plan.

Understanding the Basics of Cash Flow in the Architecture Industry

What Is Cash Flow?

Cash flow refers to money flowing into and out of a business at any given time. Typically, cash flow is assessed using a cash flow statement which reflects the business's cash flow over a specific period of time. 

A business with a positive cash flow has more money flowing into the business than out, and a business with a negative cash flow has more money flowing out of the business than in.

How to Calculate Cash Flow: Cash Flow Formula

The basic formula for calculating cash flow is:

• Cash Flow = (Cash From Operating Activities +/- Cash From Investing Activities +/- Cash From Financing Activities) / (Beginning Cash Balance)

Businesses can use alternative versions of the cash flow formula in order to obtain a more transparent and well-rounded understanding of the amount of cash available in a business at any given time. For example:

• Free Cash Flow = Net Income + Depreciation or Amortization - Change in Working Capital - Capital Expenditures
• Operating Cash Flow = Operating Income + Depreciation or Amortization - Taxes + Change in Working Capital

Read More: Outsourced Accounting Pricing For Architecture Firms

Understanding Challenges and Improving Cash Flow for Architectural Practices

In cash flow management, architecture firms face several challenges including:

• Seasonality - Seasonal fluctuations in demand for architectural services can result in cash flow shortages during a slow season when overhead costs must be maintained but incoming revenue is limited.
• Irregular Cash Flow - Architecture businesses often suffer from having a highly irregular cash flow because projects tend to have long lead times and partial payments might come in during different project stages.
• Estimates and Budget - Changes to the scope or type of a project - or any issue that results in a project taking more time than anticipated - can result in variances between estimates or budgets and actual numbers.
• Late Payments - If clients pay you late or delay remitting payment for services, this increases the firm's days sales outstanding metric, which can lead to gaps and shortages in cash flow.
• Project Delays - Firms tend to receive payment upon reaching certain milestones in a project. If projects become delayed for any reason, this can result in cash flow challenges as a result of payments getting pushed back.
• Unknown Costs - In architecture, your biggest expense is labor. If you don't understand how your employees spend their time, then you can't price your services accurately. This can result in inadequate pricing and cash flow shortages.

Read More: What Every Architecture Firm Needs To Know About Accounting

10 Effective Cash Flow Management Strategies for Architecture Businesses

1. Understand Cash Flow Analysis Basics

Understanding the basic concepts of cash flow analysis and tracking these concepts in your business will help you improve cash flow management. For example, you should be aware of the following:

• Burn Rate - The rate at which a business operating at a loss or with a minute profit margin consumes cash.
• Break-Even Point - The amount of revenue needed to cover your costs with zero profit.
• Extending the Runway - The idea of making cash last longer, until your next payments come in.

2. Know Your Costs and Optimize Pricing

You will have cash flow problems if you aren't billing the right amount for the various services you offer. In order to optimize pricing, you need to have a handle on your costs. This means knowing your indirect costs (overhead and indirect labor) in addition to direct costs (direct materials and direct labor).

In order to understand how much it actually costs you to provide your services, you first need to implement an accurate time-tracking system so that you can keep better track of the time that employees spend on certain tasks.

You must also determine an overhead allocation rate that will help ensure you have a big enough margin between direct costs and revenue to cover your firm's indirect expenses, as well as the direct costs.

3. Optimize How You Charge for Services

Cash flow isn't just about the amount of money flowing into and out of your business, but also the timing of when money flows in and out of the business. To improve cash flow, you can focus on improving the timing of your payments.

In an architecture firm, cash flow can be greatly improved by charging something upfront for your services, such as a retainer fee or a percent of the total project cost at the beginning of a client relationship. You can also work routine or milestone billing into your projects so that you receive smaller payments more regularly, rather than waiting for one, large, lump-sum payment after work has been completed.

4. Choose the Right Accounting Software

The right accounting software for architecture firms can pay off big-time, helping you strengthen profits and better manage cash flow. The right software can also be paired with a variety of integrated applications that can centralize reporting and management across your organization for better efficiency and overall operations.

6 Critical KPIs For Architecture Firms

The AEC Scorecard™️: The only KPI scorecard designed exclusively to help architecture firms drive profits.

5. Itemize Invoices and Automate Receivables Management

Be sure to itemize every task and service provided on your invoices and note how many hours were required to complete these tasks. This ensures your clients understand the value they are receiving for their money. Plus, it helps justify an increase in price if the scope of a project changes and you need to complete additional work.

Secondly, invoicing and collections should be automatic. You shouldn't need to spend time keeping track of every invoice and client, checking and rechecking each day to make sure the invoice was sent and whether or not payment has been collected. Implement a system for automating the management of your receivables and collections.

6. Simplify Payment Remittance

Days sales outstanding (i.e. the time that stretches between completing work and sending an invoice and receiving payment) has a major impact on cash flow. The sooner you get paid, the healthier your cash flow will be.

One way to help your clients pay you faster is to accept payment in a variety of forms. Instead of requiring your clients to mail you a check, make it possible for them to pay you via ACH transfer or credit card.

7. Incentivize Prompt Payment

You can also incentivize prompt payment in two ways:

1. Charge interest or late fees for late payments (be clear about payment due dates)
2. Offer a small discount for early payment (if your firm can afford to do so)

When clients pay you promptly, you will have a smaller cash flow gap and be less likely to experience cash flow shortages.

8. Keep an Eye on Reimbursable Expenses

Reimbursable expenses can strain your cash flow. Firstly, reimbursable expenses that are not submitted to a client on an itemized expense reimbursement invoice go unpaid, eroding profit margins and costing your firm untold amounts of money.

Secondly, many architecture firms fail to charge a markup on reimbursable expenses. The issue, here, is that these expenses require valuable time to incur and track. For example, if you must travel for a project, the time spent researching and booking plane tickets and hotel rooms costs you money. If you simply request that the cost of the items be reimbursed while failing to charge for your time associated with these expenses, then you'll be further eroding profit margins and inhibiting cash flow.

9. Choose Profitable Clients

Some types of projects and clients are more profitable than others. For example, needy clients with enormous projects might generate a big revenue stream, but they might also put a significant strain on your most valuable resources and most costly employees' time. As a result, these types of clients or projects can end up costing you more than they are worth.

In order to nail down the types of clients and projects that are most profitable for your firm, you need to implement a project-based accounting system that uses unit economics to generate profit and loss statements by class. This will enable you to evaluate each of your clients, services, and projects for profitability. You can then focus on those that are most profitable and fire those that are costing you money to strengthen your profit margins and improve your cash flow.

10. Start Forecasting Cash Flow

If you aren't actively forecasting your cash flow, then you'll always be reacting to problems or opportunities that have already been realized. Cash flow forecasting, on the other hand, gives you the opportunity to anticipate cash flow shortages so that you can respond thoughtfully to the information, make a plan, and avoid any significant consequences of cash flow problems.

Establish Your Best Practices for Cash Flow With Outsourced Accounting for Architecture Firms

If you're so busy juggling clients and managing employees that the financial management of your architecture firm often falls by the wayside, then you need back-office help. An excellent solution for growing small and medium-sized firms is outsourced accounting services. These outsourced services can help see to the day-to-day tasks of bookkeeping and accounting in your business while also helping you improve your financial management skills with outsourced CFO services.

An outsourced financial team can help you implement an automated system to improve your financial management and strengthen cash flow for efficient operations, increased profits, and future success.