The Cash Flow Challenges Most AE Firms Face Today
How long does it take for you to earn your fees, bill them, and finally get paid? How does it affect your cash flow?
In this article, we'll talk about the cash flow challenges AE firms like yours face today.
If you were to create a timeline of your cash flow, it's best to start on the first of the month.
At this point, you earn a part of your fee as your employees work on the projects each day. Everything you earn each day as you progress thru the month is called Earned Value. The good news is, Earned Value grows throughout the month.
As you close in on the first half of the month, you're approaching the end of a Pay Period, which means you have to make a Payroll. During this time, you've completed the work, and you're paying your employees but you haven't yet even billed for the work, much less been paid - there's money going out, without any coming in for the work performed.
Before you know it, the end of the month comes, your Earned Value has grown, and another Pay Period has closed, so you need to make another Payroll. What usually happens is it is only during this point that you start your Billing Process.
Based on the work you've done, the Payrolls made, and when the Billing Process began, you're waiting to get paid on work that happened up to 30 days ago. The same thing happens the following month, and you haven't been paid yet.
When you finally get to draft your invoices, you need to gather your time slips, expenses, percentage complete on various projects, etc. and you put them all together to draft your invoices.
Check Out Expediting Your Billings
Those drafts, then, land on the inbox of your Project Managers, who are probably distracted putting out fires and taking care of their projects, so they may not get into those invoices and review them right away. By the time they edit your invoices, finalize them with you, it often takes until the 10th of the second month before the invoices get sent out. And just a few days later, another Pay Period is completed and you need to make another Payroll again, and that's just the first half of the second month. When the end of that month comes, another Payroll must be made.
If your cash flow timelines look like this, the chances of you getting paid for the first month before the second month ends is next to nothing.
When month three comes, the due dates for the invoices have come and often gone. Clients rarely get you paid by the due date. And like the months before it, another Pay Period closes just a few days later.
On average, it's not until month four of the project that Engineers and Architects get paid. If your cash flow timeline looks something like what we just described, it will usually take around 55 days from the time you finalize and send out your invoices to the time you get paid - that's a lot of time for your firm to float with cash on the bank.
If you have money coming in from prior projects, you have to make sure it covers the days when you're busy doing the work, meeting payrolls, and letting your Earned Value grow. Plus, you have to worry about rent, bills, overhead, and everything else you have to pay for.
Many AE firms out there live with these built-in delays. But those who work under fixed fee phases have it worse.
Most of them begin the Design Development Phase right before a new month starts. As they approach the first half of the month, they start growing their Earned Value. At the end of the first month, the Billing Process begins, but the phase is not completed, so they have to wait until they issue their DD Drawings before they can think about drafting their invoices.
Add the built-in delays, and they have to wait around 55 days just to get the invoice sent out. Plus, if the client misses the due date for those invoices, they could be waiting up to 110 days before they get paid for the work they've done - from earning it to actually getting paid.
If your firm is experiencing these cash flow challenges, we have a post on expediting your billing process and one on getting paid faster.