Every architecture, engineering, and construction (A/E/C) firm knows that firm growth requires a lot of cash.  You have recruiting costs, relocation costs, costs for additional office space, etc.

But as soon as a new employee comes on board and working productively, they start repaying that investment by generating positive cash flow.  Wrong! 

Even after they are working productively, they continue to generate negative cash flow.  Here’s why:

• Q:  What happens two weeks after Jane, a new employee, shows up for work? 

  A:  She expects to get paid.

• Q:  Have you been paid by the clients for her work on their projects?

  A:  No, you haven’t even sent out the invoice yet.

• Q:  What happens two weeks later?

  A:  She expects to get paid again.

• Q:  Have you been paid by the clients for her work on their projects?

  A:  No, you probably still haven’t sent out the invoice yet.

• Q:  What happens two weeks later?

  A:  She expects to get paid again.

• Q:  Have you been paid by the clients for her work on their projects?

  A:  No, but you have finally gotten the invoice out the door.

By now, you should get the picture.  Every two weeks, you have to find the cash in order to pay Jane.  The following graphs show the impact of adding one new employee in a typical A/E firm on both the accrual P&L statement and on the cash flow statement.

As you can see, by the end of the first year, the new employee has started generating a positive profit for the firm.  But by the end of the first year, that new employee has generated negative $20,000 in cash flow.  It will take at least another year to break even on cash. 

This illustration is for a typical firm.  Remember, cash flow is influenced by four major factors:

• labor utilization rate,

• direct labor multiplier

• days in WIP

• days in A/R  

About the Author: PSMJ Director and Senior Consultant David Burstein presented his annual forecast of the various A/E/C markets at PSMJ's THRIVE 2017. Taking place October 
4-5 in Denver, this event was two high-energy days of inspiration, networking, and fun! THRIVE 2017 provides A/E/C firm leaders with the chance to learn, to network, and to get an eye-opening perspective on what the world’s most successful firms are doing right now to thrive. This unique annual event attracts senior-level executives from a wide range of A/E/C organizations located around the world.