Don't wait until you've only got three weeks of cash left. Hello architect nation, and welcome back. Enoch Sears here, founding principal of Business of Architecture. What do you do when your pipeline dries up, your clients ghost? You on payments and you've only got three weeks of cash left in the bank? Maybe this has happened to you. Maybe it hasn't. Maybe you want to prevent it from ever happening. But if you've ever found yourself staring at a terrifying drop in revenue, wondering how other architects seem to keep cash flow constant, or asking yourself if it's time to dip into personal savings again just to make payroll, you're going to love today's episode. Today's episode is an AI generated summary of a recent smart practice accelerator call, a sneak peek of a real world situation, along with the advice to prevent these stressful situations. Basically, I uploaded one of our smart practice accelerator calls to AI and asked it to give me a summary to protect the confidentiality of the firms involved. So on today's episode, you'll discover a raw behind the scene look at the one mistake that causes architects to act like banks for their clients, and how to flip the script overnight, a simple cash flow fix that saved one architect from collapse, and it's got nothing to do with landing more projects, and why the Roman chariot wheel problem is quietly killing your firm's efficiency, and how to stop it before it wrecks your future. And let me know. Do you enjoy these AI summary episodes and find them valuable or not? Today's episode is sponsored by World teams. One of the top headaches of running an architectural practice is matching work with staffing. What if there was a way to flexibly scale your workforce according to needs? A while ago, we began to hear reports of a company that was helping some of our clients build remote teams. World teams helps small firms build qualified remote teams quickly and easily, saving you the hassle of sorting resumes and interviewing unfit candidates. They work in your time zone, prioritize near native English speakers and offer flexible contracts so you can scale as needed, plus you work directly with your remote team, building trust and cutting costs without sacrificing quality. To download a free guide for building a remote team for a small architectural practice, go to Business of architecture.com. Forward slash world teams. That's one word Business of architecture.com. Forward slash world teams as a reminder, a sponsorship is not an endorsement, and you must do your own due diligence before entering into any business relationship. Get the free remote teams guide by going to Business of architecture.com. Forward slash world teams. Architect nation, if you're building everyone else's dreams while yours collect dust, it's time for the smart practice operating system. We've prepared a free 60 minute master class showing you the blueprint for eliminating overwhelm and slaying chaos in your practice. Stop drawing up excuses. Start designing your ideal practice today. Go to smartpractice method.com to access this free video for podcast listeners. Now that's smartpractice method.com and with that, architect nation, grab your notebook. This episode is a game changer. Welcome to
the deep dive. Today we're pulling back the curtain on a real life coaching call. It's focused on the financial inner workings really, of a small architecture business.
Yeah, we've got some excerpts here. It's Mr. Sears from Business of Architecture, and he's talking with several architects, you know, figuring out the ups and downs of running their own firms,
exactly. And our mission in this deep dive is to pull out those key insights, those practical lessons that you can actually apply to your own work, your business, thinking, whatever you do, even if architecture isn't your thing at all. What's
great about this is it's well, it's unfiltered. It's a genuine look at the kind of financial pressures small business owners are really dealing with, not theory, right? It's the real stuff, like making payroll, managing debt
totally, and focus things a bit. We're gonna zoom in on one architect. Let's call him Roger. He runs a six person firm, including himself, okay? And his business, it's hit some, well, some turbulence lately. We saw this kind of worrying trend in his monthly revenue. What was that? So $76,000 in January, which sounds okay, but then it dropped big time, down to $45,000 in February. Ouch. Climbed back a bit in March to $67,000 but the result for that first quarter a $52,000
loss. 52,000 loss in just three months. That's significant for a small firm. It really
is. And here's where it gets. Particularly concerning, April is looking even weaker, below that 45k mark again, and are they getting new work in that's the kicker. The firm hasn't signed a single new project in. All year. Wow,
no new projects. Is a major red flag in a project based business like architecture, that pipeline is drying
up. Exactly. It puts all the pressure on the current work, doesn't it? For sure, it
means there's nothing coming down the line to replenish the revenue.
So how's he managing this $52,000 hole? Because the bills still need paying, right?
Where's the money coming from or not coming from?
Well, it seems he's leaning heavily on debt, specifically a line of credit, you know, that flexible loan account,
okay, borrowing against a line of credit, common, but risky if it's covering losses. And
he's also having to stretch out payments to his vendors, paying them later than agreed,
hmm, delaying payments. That's a classic sign of cash flow strain. It saves cash short term, but it can damage relationships, definitely,
and using that line of credit consistently for losses, not just short term dips, that suggests something deeper. Absolutely,
it's like putting a band aid on a bigger wound. It's not fixing the underlying revenue problem. If that
sounds worrying, listen to this. It's urgent. Roger estimates the firm has only about maybe three to four weeks of cash left runway. You know, yeah, things don't change fast. Three
to four weeks. That is incredibly tight. That's survival mode, it is.
And he even had to inject $50,000 of his own money into the company personal funds. How he described it as basically selling his car to the company just to make payroll. Wow,
selling personal assets to cover payroll. That just shows how serious, how personal this crisis is. It really
does. Okay, so let's dig into why this revenue diff so much. What actually happened? What did the call reveal? The main trigger, it seems, was several projects just stopped. They were put on hold back in November and December, unexpectedly. Ah,
clients hitting the brakes. That can happen. You know, economic shifts, changing priorities, hard to predict sometimes. Yeah, a tough
hit for a project based firm. But it wasn't just that. The problem got worse because of money owed to the firm, accounts receivable.
Ah, the collection side. How much are we talking a lot? $215,000
it's over 90 days past due. Whoa,
215k over 90 days. That is serious. That's cash that should be in the bank, working for the business,
exactly. And it's not just one client dragging their feet. It's spread across four clients, four
clients with significant overdue amounts. That really points to a breakdown in collections, or maybe some very difficult client situations. Tracking that receivable aging is so vital. Let's break
down that $215 K it paints a clearer picture. So one client owes about $90,000 and the news there isn't good. They're facing potential bankruptcy.
Oh boy. Bankruptcy makes recovery really tough, often pennies on the dollar, if anything,
right? Then there's another client who also owes around $90,000 same situation. No, this one's different. Roger basically says this client is just refusing to pay, disputing the work.
Ah, the dispute scenario just as damaging, maybe more frustrating, and he
thinks they might need to sue. But here's the catch.
Let me guess, no money for legal fees. Exactly.
Can't afford to sue to get the money they need. It's that catch 22 man
that's a tough spot, being owed money but lacking the resources to actually pursue it. Vicious cycle.
The rest about $90 is split between two other clients. There's a tiny bit of good news here, though. Okay, a $10,000 payment from one is expected like this week. Well, every little bit helps, I guess. And another payment is hoped for in June. So some movement, but is not going to solve the immediate cash crisis. You know, no not
with those large amounts still outstanding and uncertain. Those smaller payments are helpful, but they won't bridge that 52k quarterly loss or the ongoing burn rate.
And then there's this other layer, a very human one. Roger mentioned he and his wife had a new baby back in September.
Oh, wow, congratulations to them. But, yeah, that's huge, huge.
And he was really open about it. Said it significantly limited his time and energy for business development. You know, the networking chasing leads
absolutely that makes total sense, especially in a small firm where the owner often is the primary business developer. Life Events, even happy ones, impact the business.
It's a clear contributor to that lack of new projects this year, a reminder that personal life and business health are often really intertwined for small business offers
sure you step away from the sales engine for a bit and it can take time for that pipeline to refill. Okay?
So given all that, the revenue drop, the receivables mess, the cash crunch, the conversation naturally shifted. How do you stop this from happening again? Prevention, right? What did they land on? Rogers already started changing how they bill. The big shift, requiring an initial payment up front for all new projects,
smart, getting money in the door before or as work starts, and structuring payments
throughout the project progress. Billing. They actually called it invoicing alchemy, which I kind of like, Huh.
Invoicing alchemy, it's about turning effort into cash more reliably. I suppose it's a much healthier model aligns payment with work done. You. It reduces that end of project payment risk.
What was interesting was the critique of the traditional way architects often Bill, you know, doing the work then sending a big invoice. Yeah, billing in arrears. Mr. Sears on the call basically said it's an outdated model, possibly borrowed from lawyers back in the 50s.
That's fascinating context the idea that lawyers shifted to hourly after service billing, partly to boost income, and architects just sort of
adopted it without necessarily asking if it was the best fit for their business model, with long projects and upfront costs.
It makes you wonder, different industries, different cash flow needs.
They use this great analogy, Roman chariot wheels. Roman chariot wheels. How does that fit the idea that the width of those ancient wheels through various historical steps ended up influencing the gage of modern train tracks? Ah,
so it's about path dependency, sticking with something just because that's how it started, even if it doesn't make logical sense anymore. Exactly,
are there things in architecture, billing, or any field, really, that are just unquestioned traditions, echoes from the past. That's a
brilliant analogy. It really prompts that critical look at why we do things the way we do. Are they efficient or just habit?
And the benefits of getting paid earlier seem so clear when you spell them out, better cash flow. Obviously, the firm isn't acting like a bank, basically financing the client's project, right?
You shouldn't be using your operating cash to fund the client's venture for months on end, and
you actually have money to reinvest in your own business, growth, stability, whatever's needed.
It just puts the firm on a much stronger financial footing. Makes total sense.
They also hit on a key danger of that delayed billing model, especially during growth phases. How so? Well, if you're growing fast, signing lots of projects, things can look good. Revenue might be technically booked, but if the cash isn't actually coming in, ah, you
can mask underlying cash flow problems until a client doesn't pay.
Precisely, you end up using money from newer projects to cover costs from older ones, that whole robbing Peter to pay Paul thing, yeah,
that's a house of cards waiting to fall. Roger mentioned he'd experienced that before. Right when they grew bigger,
yeah, grew to 20 people, then had to cut back drastically when payments didn't materialize as expected. Growth amplified the vulnerability, a painful
lesson, but one that reinforces the need for solid billing and collection practices before you scale up rapidly. So
the conversation also turned to the future, setting goals. Initially, there was talk of some pretty ambitious targets, like what aiming for $2.8 million in revenue, and wanting an ideal team size of about 12 people for cultural reasons, apparently,
okay, $2.8 million with 12 people. How does that compare to their past? Well, that's where
benchmarking came in. Last year they did $2.2 million in revenue, but with a much larger team, 20 people, 20
people doing $2.2 million so what's that like? $110,000 revenue per employee, per FTE, roughly? Yeah, 110k per FTE. But the new target $2.8 million with 12 people, that works out to around $233,000 per FTE, wow, that's That's more than double the efficiency per person, a huge leap they're aiming for.
It highlights where things maybe weren't running efficiently before,
right? Definitely. And it brings up that crucial point. It's not just about the top line revenue number
exactly the focus needs to shift to profitability. Mr. Sears used the phrase being stuck on a hamster wheel. Yeah,
you can generate millions in revenue but still make very little profit, or even lose money just churning work without real financial gain,
working smarter, more efficiently, not just harder or bigger. Profit
is what sustains the business. Allows for investment rewards the owners. It's the real bottom line.
But you know, given the immediate crisis, that three to four week runway, they had to be realistic. There was this honest talk about stabilizing first, right?
You can't really focus on ambitious growth when you're worried about making next month's payroll,
the difficult subject of layoffs even came up as a potential drastic way to cut costs fast. That's
always a brutal consideration, disruptive, tough on morale, but sometimes in a crisis,
it has to be on the table, even if it's the last resort.
So what did they settle on for a more immediate goal,
a more manageable 12 month revenue target started at $1.1 million okay,
$1.1 million with the current six people, that's about 180k per FTE, still a good jump from the old 110k but maybe more achievable initially, right? Then
they tweaked it slightly higher to $1.2 million mainly to make sure they could better cover the existing debt load. Makes sense addressing the debt while setting a reachable target, and they stress the psychology of it, setting goals you can actually hit builds momentum. Keeps morale up. Small wins leading to bigger ones. Absolutely
you need those achievable milestones when you're climbing out of a hole, builds confidence.
The final big area they touched on was strategic shifts and getting outside help. Okay, what kind of shifts? Roger identified a need to change their main design software. The. Use ArchiCAD, but he wants to switch to Revit.
The ArchiCAD versus Revit debate common in architecture. Why the switch?
He said it was mainly due to coordination problems working with consultants, especially on their more complex, high design projects. Revit seems to be more common among the engineers and others they work with. Yeah,
interoperability between different firm software is a huge deal. It can really impact efficiency. If you're constantly translating files or dealing with coordination clashes, makes sense. So his
first thought was, okay, we need to hire a BIM administrator, BIM meaning Building Information Modeling, that whole integrated design approach,
a dedicated BIM expert. But that's a significant hire, right? Huge cost,
he estimated around $100,000 once you factor in salary, benefits, all that for
a six person firm and a cash crunch, that's a tough pill to swallow,
definitely. So they explored alternatives. What about outsourcing? Specifically outsourcing the initial BIM setup, the training, getting the templates, right?
Ah, bringing in specialists just for the transition phase. Yeah, presented
as potentially faster and definitely cheaper, especially for a firm their size, tap into expertise without the long term overhead.
That's a smart strategy for smaller firms, accessing specialized skills on demand, rather than carrying the full time cost. And
here's where the group dynamic, the coaching call format, really showed its value. How so another architect on the call, a guy named Craig, chimed in. He said he had actually done something similar.
Oh, real world experience. What did he do? He used a US based
outsourcing company, but they have their draftsmen and BIM specialists based in India,
okay, leveraging global talent pools. What kind of costs was he seeing? He mentioned
getting tasks done like creating Revit families, those standard components for around 20 $25 an hour. Wow.
That's significantly less than hiring a full time US based BIM admin for $100 a year.
Massively different, and Craig had a positive experience. Said they did good work. He even offered to share the company's contact info right there on the call. See,
that's the power of those peer networks, sharing practical, tested solutions that one tip could save Rogers firm a huge amount of money in time.
Absolutely real value from shared experience. Okay, so wrapping this up, what are the big takeaways for you listening in
well, even if architecture isn't your world, Rogers story hits on universal business truths, doesn't it?
I think so. Like the absolute criticality of managing cash flow. You can have work, but if the cash isn't coming in, you're
in trouble. And the danger of sticking with outdated practices just because it's always been done this way, that billing discussion was key,
definitely. Plus the need to be honest about financial weaknesses and address them proactively. Don't wait until you've only got three weeks of cash
left. And the power of seeking help, whether it's coaching, peer advice or cost effective outsourcing, you don't have to solve everything alone. That
discussion on billing strategies getting paid upfront or progressively that applies to so many service businesses,
absolutely, and that tension between managing an immediate crisis and planning for the long term, that's something almost every leader faces at some point. So
maybe some food for thought for you take a look at how things operate in your own work or business. Are there any Roman chariot wheels?
Things done out of habit, not logic worth asking. How
tight is your grip on cash flow? Are you protected against delayed payments? What could you do better there?
And are there strategic shifts you need to make, maybe technology like Roger or processes or even staffing models to boost efficiency and stability. This deep dive
gives a pretty raw look at business reality. We hope thinking about Rogers challenges and the solutions discussed sparks some ideas for
you. Yeah, What questions did it raise? What might you explore further in your own situation? Maybe it's time for a really honest look at the financial health and operational habits of your own business or
team. And here's today's Smart practice tool tip here, architect nation, there's a financial truth bomb. Most architecture firms are collecting just 60 to 70% of what they could be earning on every project you're doing, the work, bearing the stress, carrying the liability, but leaving up to a quarter million dollars on the table annually without even knowing it. The Smart practice revenue capacity planner helps you uncover this revenue leak, it's your 30 minute financial reality check that shows exactly how much money your firm could and should be making right now. Get this smart practice tool, 100% free as a podcast listener by going to Business of architecture.com forward slash capacity. Today's episode is sponsored by World teams. One of the top headaches of running an architectural practice is matching the needs of work with staffing. Now what if there was a way to flexibly scale your workforce according to needs? A while ago, we at boa began to hear reports of a company that was helping some of our clients build remote teams. We're. Teams helps small firms build qualified remote teams quickly and easily, saving you the hassle of sorting resumes and interviewing unfit candidates. They work in your time zone, prioritize native English speakers and offer flexible contracts so you can scale as needed, plus you get to work directly with your remote team, building trust and cutting costs without sacrificing quality. To download a free guide for building a remote team for small architectural practice, go to Business of architecture.com. Forward slash world teams. That's one word. Business of architecture.com. Forward slash world teams as a reminder, a sponsorship is not an endorsement, and you must do your own due diligence before entering into any business relationship. Get the free remote teams guide by going to Business of architecture.com, forward slash world teams today, I want to acknowledge the following smart practice firms who've achieved 200 club status. These firms have demonstrated exceptional client service and operations management to achieve a financial performance measure of $200,000 of revenue per full time equivalent employee through the proper combination of people process and profit. To find more about this prestigious award and how you can apply, go to Business of architecture.com, forward slash 200 Drew and Justine, Tyndall, Jorge catrain, erini, Adams, Mark Elster, Kelly, Morgan, Christopher Brandon, ODS, Brad Hubble and Suzanne Dailey, Marina, Rubina, Judy and Larry Apple, Megan and Frank Lynn, Sven Levine. And thank you to our recent listeners who left reviews for this podcast on iTunes. Your reviews help listeners find this podcast. So this rising tide raises all boats. The more prosperous other firms are, the more prosperous you will be to be acknowledged on this show, open up the podcast app on your phone, search for Business of Architecture, and after clicking on the show, scroll all the way to the bottom to leave a review. Today's episode of The Business of Architecture show is sponsored by the smart practice operating system, the world's leading step by step solution for architectural practice management that helps you slay chaos and get back to architecture again. Because you see, it likely isn't your architecture skills that hold you back. It's probably the business aspects, those soul sucking aspects of running a practice, managing projects and people, dealing with clients, contractors and chasing money. So if you're ready to quit being a glorified administrator and get back to architecture again, go to smart practice method.com to discover the proven simple and easy to implement smart practice operating system that is revolutionizing firm management for owners and teams. Thank you for joining us here today, and I'd like to remind you that the views expressed on this show by our guests do not represent those of the host, and we make no representation, promise, guarantee, pledge, warranty, contract, bond or commitment, except to help you conquer the world. Carpe Diem, you.