Beware the Cash Flow Manager!

PSMJ Founder Frank Stasiowski often reminds us that firms do not die from lack of profits, rather they die from lack of cash. This warning is taking on a whole new significance these days for people running A/E firms. Frank is suggesting that his A/E firm clients use a Sources and Uses of Cash statement instead of a P&L statement to help them through cash-strapped times. Anyone who wants to learn more about how a Sources and Uses of Cash statement works, drop a line to my colleague Kim Pazera here at PSMJ (kpazera@psmj.com).

PSMJ consultant Mike Ellegood warns us that certain cash flow management tactics are simply toxic to the trust-based business relationships that are the principal source of most A/E firms' project opportunities. For example, Mike warns against holding accounts payable to the maximum extent allowed by law to increase your operating capital at the expense of vendors, sub-consultants and others. In this economy, if the prime is in trouble with cash so are the subs and vendors. In an environment based on trust “cash flow management” this tactic undermines the confidence that one firm places in another and in extreme cases can force a firm out of business.

Mike offers some real life anecdotes:

• Southern California during the 90’s. A small but highly regarded minority-owned geotechnical firm was working on all of the large transportation infrastructure projects, the transit system, commuter rail, the Alameda Corridor rail freight line, etc. They were subs to all of the big firms, Parsons, Jacobs, DMJM, and so forth. While they had a huge backlog and did excellent work they could not sustain themselves because of cash flow. The financial managers of these big firms held onto their cash and almost drove this small firm into receivership.
• Phoenix Sky Harbor Airport, present day. A prime design consultant working on a major airport project wasn’t paying minority subs promptly. Cash flow became a problem for the subs, they in turn complained to the airport and the airport management was forced to insert themselves into the process. This won no prizes for the prime.

There are countless stories like the two above but the bottom line is that A/E firm are in the business of intellectual capital, you are not buying or selling “stuff” - thus there must be a higher level of trust between your client and you and you and your vendors and subs than there would be if you were buying pencils or computers. A singular element of this trust is that bills will be paid promptly.

Bruce