As an architect firm owner, you must understand the importance of working capital for your business’s growth and financial health strategies. The first thing you need to focus on is your accounts receivables. This is because accounts receivable is one of the most accessible and best working capital sources for your business.
Remember, you have already earned the account receivables; you just need to collect them now. However, it is a job easier said than done. Therefore, you need to implement best practices for working capital management to easily and quickly turn your outstanding invoices into capital your business needs for growth.
So, let us dive right in to discover what working capital management is and which best practices can help your architect firm.
What Is Working Capital Management?
Managing your business’s working capital is a strategy that enables your company to operate efficiently by using and monitoring your assets and liabilities to the most effective use.
7 Working Capital Best Practices for Architect Firms
Here is how you can efficiently manage your working capital and ensure that you are saving every penny and avoiding any write-offs.
- Research, Research, Research
To get a hold of your company's working capital and ace its management, you need to do some research. You may wonder why you need to do research on your own business. The reason is that it will help you dig deeper and get to know your customers and your business’s key metrics every now and then.
You have to ensure to note where your business is currently standing on the collection effectiveness index, Days Sales Outstanding (DSO), write-offs, and average days delinquent. Do some research into the architect industry and stack up your company in comparison to the benchmark for key metrics in the industry.
- A Mission Statement
You must create a mission statement for your collection and credit department. This will help align your team with the comprehensive goal of the department. The goal of the mission statement is very high level and must state what the department wants to achieve in broader terms instead of concrete numbers.
This mission statement has to be different and separate from your company’s mission statement. However, it should still align with the overall business goals.
- Setting Goals
Once you have implemented the first 2 working capital best practices for an architect firm, you will know where your company stands amongst the key metrics. The next step would be to set up some goals. The goals should be SMART with a deeper dive into the mission of your collections department.
SMART is an acronym for Specific, Measurable, Attainable, Relevant, and Time Sensitive. Therefore, you must define these goals in more detail than the mission statement of the department with specific figures/numbers to achieve.
However, you have to be realistic about it. For instance, the industry’s average is 40% lower than yours. This does not mean that your company can achieve the 40% reduction within a month. You should set milestones within a mission statement with a date attached to each milestone.
A deadline for each milestone will ensure that the team understands the urgency to achieve each goal. One of the best examples to set SMART goals include reducing your bad debt and write-offs by 3% within the next 6 months. Another goal can be to contact 70% of your clients for missed invoices 2 days after the due date.
- Clarity of Roles and Responsibilities
Every employee working in your collections department must have a defined role. Do you want to manage your working capital better and collect what the customers and clients owe you? Then your staff needs to understand what they are doing and what you expect them to do.
If you fail to define the job description with responsibilities, each employee will simply shrug it off, saying, "it is not my job." Therefore, you need to put it in writing which of the employees are responsible for the following tasks:
- Sending follow-ups
- Collection letters
- Reminder emails
- Managing invoice disputes
- Making follow-up calls
- Placing credit holds
- Deciding credit limits for each customer
You must understand the importance of clearly defining the roles and responsibilities of all team members in the collections department. This will ensure that each critical task aids in reaching your company’s goals for working capital management.
- Your Sales Team Has a Role to Play
Your efforts for payment and collection are the final process in completing each sale. Make sure that your sales team is talking to each customer more than the credit and collections team. Let your sales team manage the payments for each account.
This will also take off the pressure from your collections department. The sales team tends to enjoy a better relationship with the clients after spending a substantial amount of time working out the details of each architectural project.
Use this to your advantage and let your sales team capitalize on this already built rapport with the customers when it is time to collect the payment.
- Using Technology to Your Advantage
Once you have implemented all the best practices to achieve your work capital management goals, it is time to implement it. Communicating with your clients and following up on due balances and invoices can be a lot of work.
Thankfully, technology has found its feet in the architectural industry. Now you can deploy affordable and attainable technology in your company for maximum efficiency. For instance, you can use accounts receivable management software to eliminate manual tasks and prevent human errors.
As the software takes care of your receivables, you can use your staff for more growth-associated tasks. For example, you can assign staff to manage working capital by creating, measuring, and tracking goals while overseeing their assigned roles and responsibilities.
- Adequate Financing
You can opt for short-term business loans to manage your working capital properly. Securing working capital financing helps increase your working capabilities as you get access to sufficient liquidity to run your current operations with limited risk.
For this, you need to analyze the KPIs for your working capital, and the business needs to select the right type of funding. If you already have a business loan, refinancing is another useful method to extend the loan term with lower monthly repayments. This will help you free up some of the current working capital.
Your strategy to better manage the working capital in the architect industry should include managing assets, liabilities, accounts payables, and accounts receivables. Working capital performance metrics, KPIs, and assigning responsibility to your teams will help increase operational efficiency and generate more cash for your business.
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