Whether you are getting your firm ready to present to potential buyers or headed out on the deal trail to find potential acquisitions to shore up your own growth strategy, one of the biggest red flags in today’s super hot market conditions is declining revenue on accrual-basis financial statements.

Of course, that often flows right down to declining earnings as well…and buyers who quickly become skeptical about any forecasted recovery.

Even if you are forecasting a blockbuster year ahead, actual performance is always going to be the best indicator of future performance. What if there were a way to see some of these dips long before they hit tine income statement? When you still have time to increase your marketing spend or initiate layoffs or other cost-cutting measures to preserve profits? There are!

Here are three easy ways to see revenue problems coming while you can still fix them:

1. Proposal activity. Long before it hits the income statement, cash starts out in the (very illiquid!) form of proposals going out the door. Even earlier than counting actual sold/won proposals, the volume of proposals produced provides you with a early-stage leading indicator on which way market demand is headed for your firm. Whether you measure it in dollars, volume, or some other relevant form, watch your proposal activity closely and you’ll see when a dip may be coming soon.

2. Backlog. Of course, the cash starts getting more certain when we look at actual hard booked backlog. Don’t get confused by soft backlog that may be weighted based on probabilities and such. To use a farming analogy, if proposal activity is the seed in the soil, backlog is the green chute starting to poke up. Backlog reports don’t get the love they deserve in M&A forecasting (and certainly not the action they deserve when they start showing signs of trouble!).

3. Cash Receipts. Before it hits the accrual statements, the harvested fruit starts to come in the door as unearned cash. When the unearned cash coffers start to decline, the accrual-basis financial statements will soon feel the hit. By this point, in the long sales cycle of architecture and engineering services, it is getting hard to impact near-term revenue trends, but you can take action on the cost-cutting side to preserve profits.  

Don’t wait until declining revenue is inked in the financial statements before you develop a recovery plan. Stay in front of it and you can avoid costly and transaction-killing surprises when you starting the M&A surprises. You don’t get a second chance to make a first impression!

You can learn more identifying and leveraging your A/E firm's value drivers in PSMJ’s "just-released" Navigate the Hurdles to M&A Success: The Ultimate A/E Mergers & Acquisitions Manual . It provides hundreds of pages of insights and advice, backed up by innovative thinking that only the successful PSMJ advisers can make. PLUS, you get dozens of tables, charts, worksheets, and templates to get on track for success!