Business Strategies

BY BRUCE LYNCH

Management

How to Get Cash in a Tight Credit Market

Nobody needs to tell you that we're experiencing turbulent economic times. In this climate, providing great design and superior service is not enough. As a design-business professional, you have to choose to turn these current economic challenges into real opportunities to strengthen your firm.

Here's something to keep in mind: Design firms don't die from lack of profits; they die from lack of cash.

Long-standing firms have survived through every economic downturn, from the energy crisis of the 1970s through recessions in the early 1990s and post-9/11. The formula for succeeding in this environment is simple: When you manage cash effectively, you win. So here are some tips and advice to help you make the critical cash-management decisions required to weather economic storms — and more important, to help you come out the other side even stronger.

Four Things You Can Do Right Now to Improve Cash Flow

1. Know your clients. Maintain great relationships with the people paying your invoices. Keep copious notes on little things, like who had a baby and who got married. People are more willing to pay someone they know and trust. When cash is not forthcoming, offer to work with clients on payment plans.
2. Use smart invoicing. Submit all invoices as quickly as possible after interim work or tasks are complete. Bill while your work effort is fresh in the client's memory. The longer you wait, the greater the risk that you'll wait even longer for your money. Don't send supporting documentation with your invoices; one question on a single figure could hold up payment on the entire invoice.
3. Make friends at your bank. Get to know and stay in touch with your banker. If you do need to get a line of credit, come prepared to answer questions and take a serious approach. Don't show up with a few notes scribbled on a legal pad. Make sure that your banker gets cash flow and income statements quarterly and sales forecasts annually. And if you get turned down, don't give up — continue to send financial information.
4. Plan for work interruptions. What do you do when cash-strapped clients stop work? In your contracts, include clauses that stipulate extra charges when clients initiate delays or cancellations of work. Stipulate a monthly maintenance fee until the schedule gets back on track. The fee you charge for work interruptions is in addition to regular fees and changes. Be prepared to justify this fee — explain to clients that people do not stop charging time to stopped projects.

How to Work with Banks

Sometimes you need to work with your bank to ensure that you actually have enough cash on hand to be profitable. I know this sounds weird, but there have been plenty of firms that have gone out of business profitably. In today's economic climate, your design firm is only going to get one chance to get what it needs from a bank. Make sure you get it right the first time. Every commercial lending application your firm submits is listed on your credit record — so if you're turned down by one lender, the next will see that you were declined already, greatly reducing your chances of getting a loan. You can take simple steps to prove to the bank your commitment to your firm, demonstrate your ability to pay them back, and make your deal the first time, every time.

The biggest mistake design firms make in working with banks is not preparing the right information for them. Your ideas and enthusiasm are not enough. Be deliberate in your preparation process. Lay down the fundamentals of a relationship with the bank, practice how to communicate your understanding of your market to the lender, and be familiar with your projected expenses and income, as well as your business plan.

Four Ways to Improve Your Chance of Securing Financing

1. Start with a good accountant. You improve your firm's chances of securing a loan the first time if your accountant has the make-up to lead you through the process smoothly. Make sure your accountant understands the design business, is knowledgeable in both tax and business strategy, and can handle your work expeditiously.
2. Get your data in order. Build your preparation efforts around these data: 1) your firm's financial statements, including balance sheet, income statement and tax returns; 2) your owner(s) financial statements and tax returns for the past three years; 3) monthly cash-flow projections based on obtaining the loan; 4) a thorough and detailed business plan; and 5) specific details of how the loan will be used.
3. Shop for lenders. Have prospective lenders give you contact information for four or five references, preferably businesses similar to yours in size and industry. Ask the references: 1) Did the commercial lender treat you fairly? 2) Did you get the entire amount you needed? 3) Did the commercial lender provide help on your application and paperwork? 4) Did you ever have trouble making loan payments? If you did, how did the lender react? 5) Would you work with this lender again?
4. Don't be "undesirable by association." Some types of businesses are deemed "undesirable" by lenders. Fortunately, design firms are not generally on the list. However, it's worth finding out what kind of businesses the bank deems undesirable. If some segments of your client base are on the lender's list because of economic risk factors (industries in decline or subject to strict legal controls) or ethical concerns (adult businesses, firearms, alcohol/tobacco), you would do well to focus on the potential upside of other client types.

Where to Go for Help

PSMJ Resources Inc. offers financial-management coaching to design firms. For more information, contact Kim Pazera at kpazera@psmj.com. PSMJ also offers a book called Dollars & Sense: PSMJ's Guide to A/E/C Financial Management. To find out more, visit www.psmj.com.

Bruce Lynch is vice president of publishing at PSMJ Resources, Inc. and author of PSMJ's Circle of Excellence: How the Best-Run A/E Firms Manage Clients, Staff, and Projects.