Stephen King serves as President & CEO of GrowthForce, a leading outsourced accounting and controller service provider for businesses.
Many individuals who own and operate engineering firms started out as engineers before building their businesses up around the services they provide. When a business is built around a professional providing a service, the engineer must learn business leadership skills to become a functioning CEO as well as an engineer. This means you have to be an engineer, a business leader and business strategist while also understanding financial management practices for commercial enterprises.
It’s a lot of hats for one person to wear, but it can be done.
Understanding The Basics of Cash Flow
Cash flow refers to the net amount of money flowing into or out of a business at any given moment. A cash flow statement is a report that shows the cash flow (cash flowing in and its usage) in business over a set period of time.
The Cash Flow Formula
To calculate your cash business’s cash flow from a cash flow statement, use the following formula:
• Cash Flow = (Cash From Operating Activities +/- Cash From Investing Activities +/- Cash From Financing Activities) / (Beginning Cash Balance)
There are other types of cash flow calculations as well. For example, free cash flow and operating cash flow.
• 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
These formulas can be helpful in addition to calculating cash flow because they show you the actual amounts of money available in your business and a more typical picture of your company’s cash.
Seven Cash Flow Best Practices for Engineering Firms
1. Understand that cash flow is the lifeblood of your business.
Firstly, it’s essential that you understand how important cash flow is to your business. Your cash flow represents your company’s ability to operate, cover expenses, make payroll, keep the lights on, grow, expand and make payments to investors. Once you understand the importance of maintaining a healthy cash flow, you’ll also understand why having a cash flow management strategy in place is vital to your company’s success.
2. Spend conservatively.
Of course, you already know that saving money is good for business, but it’s also good for your cash flow.
3. Know your true costs.
In any service-based business, like an engineering firm, labor is usually the biggest expense. Unfortunately, it can be a real challenge to accurately track your employees’ time in order to understand your true cost of doing business.
So, it’s vital for service-based businesses to implement powerful and easy-to-use time-tracking tools to ensure their employees are not only able to track the time they spend on the clock but also to keep track of how much time they spend working on different projects while they’re on the clock.
This type of detailed time tracking will enable you to allocate your labor costs to specific jobs, pull profit and loss statements by class, and evaluate your profit margins and ROI on different categories or individual clients, jobs, departments and employees.
4. Price your services right.
When you have implemented accurate systems for time tracking, you can finally know your true costs, which means you can finally make an accurate assessment of your pricing.
When you know how much it costs you to draw up plans for a new housing development, bridge or park, you can finally know how much you truly need to charge for those services in order to generate the kinds of profit margins you need to keep your cash flow positive and your free cash flow strong. When you know your costs, you can build your profit margins right into the estimates you provide your clients.
5. Optimize payment terms.
Cash flow isn’t just dependent on the profit margins you generate in your prices, but it’s also depending on the timing with which you receive payment.
Imagine if you only charged a big client a single lump sum at the end of a 12- or 24-month project? What would your cash flow look like while you were paying your employees over that one- or two-year period while not receiving any payment for the work that had already been completed? Pretty bleak, right?
For this reason, proper cash flow management depends on optimized payment terms and repayment structures. Require that your clients pay up-front for work or set them up on monthly invoicing schedules, rather than accepting a single payment after the completion of a project.
Make sure you clearly present your payment terms to your clients, so that they’ll know what to expect and what they are responsible for in terms of their billing cycles.
6. Automate accounts receivable.
Do not let your own poor management of accounts receivable be responsible for your clients’ slow payment and your negative cash flow. Stay on top of receivables by automating as many steps as you can, such as invoicing and payment reminders.
Additionally, provide your clients with several options for making payments. Sure, they could write you a check and send it in the mail, but you’ll receive your payment much more quickly if you’re also set up to accept electronic payments, credit, debit and ACH.
7. Get ahead of cash flow shortages.
Stop reacting to cash flow shortages after they’ve already occurred by actively forecasting your cash flow. As you continue generating cash flow statements and building up a history of financial data, you can generate accurate, data-based cash flow forecasts. So, you can start anticipating, planning for and preventing cash flow shortages.
Making The Most Of Your Cash Flow Strategy
In order to accurately track employee time, categorize expenses, automate receivables and generate cash flow statements, remember that you’ll need a solid, high-performing back office to manage the nitty-gritty of your company’s finances for you.