The downfall of architectural firms: hidden working capital

People who owe us money are called our debtors. People who we owe money to are called our creditors.

In the real world, there will always be a delay between when we issue an invoice and when it gets paid. The longer this takes, the more spare cash we need in order to meet our monthly outgoings.

This spare cash is referred to as working capital. It’s the amount of money that we need to bridge the gap between our debtors and creditors. We should always aim to need as little working capital as possible to survive and grow our business.

The downfall of architectural firms: hidden working capital

There are two main areas where working capital requirement manifests itself:

• bids / competitions / risk work: costs incurred when delivering a project before it is won (or lost) still need to be paid long before we might invoice (or not) on the job
• milestone based billing: most construction projects are delivered in work stages with an associated fee for each stage. It may take months to complete some stages with our practice funding the costs incurred until we are able to raise an invoice. For an architectural firm, this means we need to invoice early and chase our debt as hard as possible. Architects can’t really delay paying staff, which makes up the bulk of our expense bill, and expect them to stay working for us.

Tips to keep your debtors book under control

Invoicing is the first step in improving cash flow. But most important is to ensure that invoices are paid.

• Empower the team – Make everyone aware of the unpaid invoices on a project so they can help put pressure on the client for
• Good Cop / Bad Cop – Or it could help for a third party to be the ‘bad cop’ and send a demand for payment if we feel uncomfortable chasing clients.
• Stop working on projects with unpaid invoices – a drastic measure but it can be an effective way of ensuring payment. Working for a non-paying client is the same as taking out debt to pay salaries that the unpaid invoices should have paid. Why should we be the financier of the project?
• Stop working for clients that don’t pay – If a client has a bad reputation for payment, stop doing any new projects for them.

Keep focus, become more profitable

I hope you have enjoyed this series of articles outlining the 3 key areas to focus on to ensure a profitable practice.

There are a myriad of administrative tasks to running an architectural practice, finance is just one of dozens of other important issues vying for your attention. However, by focusing on the 3 key drivers of project profitability you will be able to ‘see the woods from the trees’ and take your practice to the next level.

If you would like to learn more about how Fresh Projects can help you with these 3 key areas, go here.