What Drives Profitability?
There’s a number of factors that drive profitability for Architects, Engineers and Design (AED) businesses—particularly in today’s competitive environment. Even so, many businesses have set record profit levels in the past several years.
How have they achieved this? Firstly, they have not spread their attention across the many components of the business that may affect performance. And secondly; they have had a clear and concise focus on the Financial Management of their businesses. Though notably, more pragmatic challenges in the existing environment can make this key area of any business difficult to address.
The Financial Management Challenge
Many AED businesses build their own systems or adapt to what they have been exposed to in the past. It’s rare for the leaders to be exposed to great business and financial management before establishing their own businesses.
Not only that, we are in an environment of reducing fees for service. It’s goes without saying that winning work with low fees places significant pressure on profitability, quality, and cash flows—and ultimately on the “brand”. As a consequence, strong and effective financial control and management systems are becoming increasingly important.
The ability to understand a company from financial statements is one of the primary differences between small and large businesses. Where and how will you attain this capability?
Where to Focus?
You might feel that your finances are complicated and confusing, but the following should help you gain control of them.
1. Have a clear strategic direction
Your strategic objectives will articulate where you currently are and where you would like to go, in the next few years. It should detail how you will finance your business and look ahead 3-4 years, with deliverable outcomes for the next 12 months and 90 days. It should be concise with definitive time-frames, yet flexible. Leadership needs to drive the process and it goes without saying that it should be exciting.
2. Know your financial position
You should regularly monitor the progress of your business. On a daily basis, you should know how much money you have in the bank, how many invoices are currently waiting to be paid, and how many projects you have in the pipeline. You should also review your position against the targets set in your financial plan on a monthly basis.
3. Ensure clients pay you on time
Businesses can run into major problems because of late client payments. To reduce the risk of late or non-payment, you should make your credit terms and conditions obvious from the outset. You should also quickly issue invoices that are clear and accurate. Using a sophisticated credit management system will help you to keep track of clients’ accounts.
4. Know your day-to-day costs
Managing costs is a critical element of success. Even the most profitable companies can face difficulties if there isn’t enough cash to cover day-to-day costs—such as rent and wages. You should be aware of the minimum amount of cash your business needs to survive and ensure you do not go below this – increasing competition has put pressure on the pricing models of even the most established businesses.
5. Keep up-to-date accounting records
If your accounts are not kept up-to-date, you could risk losing money by failing to keep up with late client payments or not realising when you have to pay your suppliers. Using a good record keeping system will help you to track expenses, debts and creditors, apply for additional funding, and to save time and accountancy costs.
6. Meet tax deadlines
Failing to meet deadlines for filing tax returns and payments can incur fines and interest. These are unnecessary costs that can be avoided with some forward-planning. Keeping accurate records saves your business time and money, and you can be confident that you’re only paying the tax you owe. Therefore, it’s important that you meet your obligations.
7. Become more efficient and control overheads
Is your business operating at its most efficient? For example, cutting the cost of your internet, phone, or software licensing, through more competitive billing, optimising the number of user accounts required, or doing away with software and equipment that’s not essential, can save your business money and allow it to operate more efficiently.
8. Get the right funding
It is essential that you choose the right type of funding for your business. Each type of funding is designed to meet different needs. Smaller businesses usually rely more on business overdrafts and personal funding, but this might not be the best kind of funding for your company.
9. Seek professional advice
It is always very stressful facing financial problems as a business, but there is help and advice available to help you tackle them before they get too large to handle, so seek professional advice as soon as possible. There are also some initial steps you can take to minimise the impact, such as tackling priority debts first and assessing how you can improve your cash flow management.
How Financial Management & Reporting Drives Consistent Profitability
An effective solution—streamline financial management by unifying disconnected processes and fragmented information into a common, shared environment—a single source of truth. For decision makers at all levels, such solutions present a current view of clients, workload, resources, and finances to better manage budgets, create and consolidate reports, and look for trends and relationships in all parts of the business.
A unified business solution is ideal for exposing the consequences that can be wreaked from the numerous small and seemingly disconnected decisions that are made by the leaders.
Clients now require complex and time-consuming project reporting and financial accounting. Though critically important for client relations and compliance, this non-billable work does represent an opportunity cost. Resources that are engaged in providing invoice transparency are not doing work that could otherwise be driving growth. Modern financial management solutions take care of this by placing controls on each project, enabling people to record billable time to the appropriate phase, task or cost-centre. Correct and client-acceptable invoices enable accounting teams to bill faster, reducing service-delivery cash cycles, while delivering a higher level of client satisfaction.
Integrated financial reporting solutions provide consultancies with current, on-demand financial intelligence about their business operations, which help to manage risk and streamline operations. In turn, the efficiencies provide more time for senior managers and partners to focus on clients.
Economic conditions are constantly changing and the factors that contribute to growth in all sectors are shifting. Profitability within the AED industry have historically been dependent on overall economic conditions. When the economy is booming, many businesses do so well they are too busy to implement solutions.
And the economy slows, budget constraints usually forestall upgrading or implementing needed solutions. But that doesn’t need to make management queasy. Controlling the uncontrollable means businesses must smooth the jagged peaks and fill the deep valleys of an otherwise cyclical business. The only way to accomplish this is by truly optimising project and financial management capabilities. Only then will a AED business be able to profit consistently.
Arrange your complimentary consultation with the aim of assisting you to make the most effective decisions for maximising your business performance.