Poor Cash Flow Can Affect an A/E Firm’s Value
Poor cash flow directly impacts the value of a firm, more so than profits. Understanding the difference between profits and cash flow is the first step to strong financial management, according to consultants at Natick, Mass.-based ZweigWhite.
"Growing companies, even profitable ones, often experience financial pains. I've heard of successful companies growing themselves out of business because of liquidity issues," says David Rabinovitz, a ZweigWhite associate who specializes in financial advisory services. "We have found the greatest impact to cash flow, other than profitability, is how quickly a firm can collect its accounts receivable."
Rabinovitz has some tips for improving the efficiency of collections for professional service firms, thereby improving firm cash flow and increasing firm value:
Analyze the accounts receivable aging report. Who are the recipients of the firm's projects: large private companies or government agencies? Does the firm perform work directly for project owners or act as a subconsultant to other firms who work for the project owner? Which types of clients pay sooner than others?
Involve the accounts receivable manager. Invite the accounts receivable manager to participate in the project initiation phase to work closely with the client. Once the company understands the client's payment process, invoices can be converted to PDF and sent electronically to the client for payment.
Understand the client's billing submission window. For indirect clients, understand the owner's approval process and track the client's billing-submission window to ensure the firm would not lose 30 days by missing that submission window.
For more information, go to www.zweigwhite.com .