Keep your lifeblood flowing

Running out of money at a critical moment is the downfall of many firms. Stay ahead of your cash flow

All accountants and bank managers (or ‘relationship managers’ as they now prefer to be known) love cash flow forecasts. This is because they are the most accurate way to predict the future financial health of the business, both in the short and medium term. Accountants know, from their experience in dealing with insolvency, that most businesses fail because they simply run out of cash. The popular misconception is that businesses are forced to close because they failed to make a profit or to find enough customers. The truth is that most are forced into liquidation because they could no longer meet their financial obligations as they fell due and the bank’s goodwill had been exhausted. 

You will commonly hear the directors of a recently declared insolvent company make comments such as: ‘If only that major customer had paid us on time then we would have survived.' Tax is often the last large payment that simply cannot be met and pushes a business that has been teetering on the brink of its overdraft limit for the last few months over the edge. As a number of professional football clubs have discovered in recent years it is often the VAT department of HMRC that initiates winding-up procedures.

The cash flow forecast is one of the key documents the bank will want to see regularly in support of its overdraft facilities, and it is important to ensure that it is as accurate as possible. The bank will review the accuracy of forecasts it has been given in the past. While it will not expect them to be entirely accurate, if they have been consistently inaccurate, the bank will begin to doubt the competence of the management team and the practice’s ability to manage its financial affairs. If the bank feels uncomfortable, it may be unwilling to renew the overdraft facility when it falls due, which could have serious financial consequences. It is worth remembering that bank overdrafts are repayable on demand, which means that the bank has a right to ask the practice for the entire amount outstanding on the overdraft to be paid back within a few days.

Cash flow management is often much more difficult for an architectural practice than it is for other service based businesses such as solicitors or accountants. The inevitable side effect of any delay on a project will be the subsequent delay in invoicing and hence the eventual receipt of payment.  As experience has taught us, there are countless ways in which a construction project can be delayed.  Thus there are countless ways in which our incoming cash flow can also be delayed.  My cash flow forecast is directly linked to my fee billing forecast. When a project hits a delay, I revise the billing forecast and can instantly see the effect on our future cash flow.  If a major project income stream is delayed for a couple of months this can have a devastating effect on the practice’s short term solvency. This is why architects need their overdraft finance organised and available for use well in advance. It is often said that the best time to arrange a loan is when you don’t need it; the worst is when you are desperate for it.

Cash flow forecasts need to take account of other items such as capital expenditure on cars, computer equipment and furniture as well as day-to-day income and expenses. These can require large amounts of cash to be found at a particular point in the year and can throw the whole cash flow plan adrift accordingly.

Cash flow is often described as the lifeblood of the business. It is useful to think of cash in these terms, something that needs to keep circulating in order to keep each part of the practice healthy.  A large pile of cash is not a problem many architectural practices suffer, but it is also not a good idea to sit on funds for too long.  Money needs to flow and be used creatively rather than just be left to accumulate in the bank account.  This is especially true in the current ultra-low interest rate environment.

It often comes as a surprise to read that an apparently profitable and successful architectural practice has gone into liquidation or receivership. Some well-known and long established practices have disappeared in recent years after operating very successfully for a long time. This will simply be because they ran out of cash, rather than because they were unable to attract profitable business.

For architects of any size cash flow management needs to be a daily consideration.  Cash flow problems can bring a practice to its knees very quickly and even the most brilliant and innovative design will never be realised if the practice becomes insolvent.

Brian Pinder-Ayres is author of Financial Management, published by RIBA Publishing