You’ve likely heard the age-old expression: “Cash is king.”
Cash flow management can determine the survival of a business. While there are other factors that need to be considered in a business beyond cash, it is undeniable that cash is usually front of mind.
In architecture, cash flow requires a delicate balance. Because projects can last years, it can be difficult to ascertain how much cash exists in a practice at a given time period, or how much needs to be budgeted for next year.
Hence, the cash flow project.
A ‘cash flow project’ is a project that an architecture practice takes on to pay the costs of operating, such as employee’s wages. It’s a project that you take on when you’re worried there might not be enough funds to pay the lease on the studio or cover last month’s electricity bill.
Many architects might wince at the idea of a cash flow project. It’s likely not the most exciting project you have on the docket. Maybe the design is a tad more simplistic, or maybe you consider the paycheck to be below your pay grade. Or worse, maybe you took it on simply to make ends meet without properly vetting the client and judging whether it will be a good fit.
Whatever the case might be, cash flow projects tend to be commonplace and should be treated as such.
It’s important to realize that cash flow projects are not necessarily “bad” projects. Rather, they should be looked at as part of your product mix and thus balanced alongside your other more lucrative projects.
Ultimately, it comes down to vision and transparency. If you’re going to take on projects for cash flow, you’ll have to budget for them. How many cash flow projects are you going to do per year? How much of our overall revenue will be tied to cash flow projects? What margins will they provide for the practice?
But in order to be able to make these sorts of decisions, you’ll need to have transparency within your practice first. That means knowing exactly what your sales, direct costs, margins, overhead costs, and other fees are.
If you’ve got a handle on these numbers, it will help you make strategic decisions about what you’re doing and what you need to do to make ends meet. It will also help you maintain morale high within your practice, so your employees don’t get bogged down by what they might consider to be menial work.
There are many tools, such as Xero, now that can help you get clarity on these figures so that you can make informed decisions. At Archibiz, we also show you how to tackle finance in your practice so that your project mix is exactly how you envisioned it and you feel comfortable with the cash reserve in your practice.
How to manage your cash reserves, budget for the future and lead a profitable practice are among some of the many topics that we cover in our Archibiz online courses. If you’re looking to gain clarity on your finances and become a more confident business leader, we suggest you check out our programs for architecture practice leaders now.