Colander Associate, Michael Holmes explains why the main reason companies go out of business is the lack of cash...
A company can be very profitable but if it is not able to collect its cash it will fail; conversely companies with little or no profit but good cash flow can continue to trade for sufficient time to turn around profitability. Control of cash is therefore the most important thing you can do as an owner/ manager in a business.
It is imperative therefore that all businesses have an up to date and regularly produced cash flow spreadsheet, forecasting the cash over at least the next six months trading. Smaller companies can in fact be run off a cash flow alone.
Control of profits
In professional service firms (such as Architects and Designers) the control of profits is best done by ensuring that your staffing reflects your workload. Staff costs can be as much as 60% – 70% of your cost base and as such, it is important to ensure that you are not over-resourced. In order to control this you need to know two things:-
1. The average monthly turnover per fee earner that you do
2. The forecast fee income for the business over the next six to twelve months.
Dividing the fee income by the average turnover per fee earner will give you an indication of the number of staff your business will need over the period of the forecast. This allows you to plan your resourcing more accurately.
The main reason for the leaking of profits is not aligning your staff numbers to your turnover quickly enough: advance notice of any drop off in required staff numbers can enable you to avoid this mistake.
Cost rates
Knowing what your cost rates are is vital in order to know both what the profits are on your projects and what your true cost is when calculating fee bids. It is rare to see a firm that has this calculated correctly.
What you should be trying to do is recover all of the costs of the business on your projects and in order to do this you need to ensure that the overhead is correctly attributed to your cost per hour.
If you are unsure that your cost rates are correct then take advice on how to calculate them correctly.
Control of time
Once you have accurate cost rates then you can record time on your projects and this allows you to see what it actually costs to do the work. Hours booked to projects are not free and once you have the visibility of the true cost of the time, you make better decisions regarding how much time you are willing to book on the projects.
Control of costs on projects leads to increased profits and better cash flow so it is worth doing and doing well.