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CPA firm highlights key findings related to bad debts, chargeability and break even multiples
Woburn, MA June 29, 2009 - DiCicco, Gulman & Company LLP (DGC), a CPA and business consulting firm specializing in the architecture and engineering (A&E) industry, has released initial findings from its 2009 Architectural Study. The study provides analysis and tips on best practices for architecture and engineering firms as they navigate through the current economic environment.
While the study highlights many financial performance trends, three key areas emerged as notable trends to watch: an increase in the occurrence of bad debts; a decrease in direct chargeability of staff and firm principals; and a rise in overhead rates and break even multiples. The numbers are far from what they have been in previous years, presenting a new set of challenges that need to be overcome. The overall analysis from the study shows that planning for the recovery is necessary and obtainable when focus is placed on proactive decision making and quickly addressing changes in firm performance.
"Our research finds that in 2008, bad debts rose a staggering 95% from 2007," said David M. Sullivan, CPA and Partner at DGC heading up the study. "With the current economic situation there was speculation that bad debts would rise, however not at such an alarming rate. It is important for architecture and engineering firms to ensure that they are following best practices when it comes to billing and collections for their services. This includes staying in constant contact with clients and closely monitoring aging accounts receivable," Sullivan noted. "Additionally, firms need to know when to stop work and start a payment plan."
The DGC 2009 Architectural Study also reports that the 2008 average chargeability of A&E firms decreased to 62.9% from 64.6% in 2007. This trend continues into 2009 as many firms struggle with determining the proper staffing levels needed to support a consistently decreasing backlog of projects. "The fourth quarter of 2008 began a wave of staff layoffs and reductions not seen in the A&E industry in decades," notes Chad DaGraca, CPA and Principal at DGC. "This decrease in staffing levels puts an additional burden on firm principals' time. Furthermore, many firms are left with an infrastructure and fixed cost structure of a much larger firm, leaving the firm with a higher overhead rate and break even multiple going into the remainder of 2009."
"It is extremely important that principals divide their time appropriately between marketing, management and direct chargeable time," said Joe Silveira, Principal and CFO of Cambridge Seven Associates, Inc., a comprehensive architecture and design firm based out of Cambridge, MA. "It is very easy to get caught up in client work, letting firm responsibilities slide. At Cambridge Seven, we hold weekly marketing meetings where activities and outreach are discussed in real time. This system is extremely effective for us as it holds everyone accountable, ensures our pipeline is full and promotes team work and new and innovative marketing ideas on a regular basis."
As the workload for A&E firms began to slow in the fourth quarter of 2008, the overhead rate and break even multiples for the average firm rose. The initial findings from DGC's Architectural Study indicate the 2008 average overhead rate per direct hour increased to $65.97 from $58.75 in 2007. In addition, the average 2008 break even multiple increased to 3.00 from 2.83 in 2007. First quarter results for 2009 indicate that these negative trends have continued. Many firms are finding that fixed costs, such as rent, professional liability insurance and certain employee benefits are difficult to reduce. In addition, many firms have been faced with the lingering impact of layoffs and have paid severance and continued benefits as part of their staff reduction efforts. All of this, combined with an increase in bad debts, has made it critical for firms to control overhead costs in 2009 if they expect to return to profitability this year.
"Architecture and engineering firms have significantly less room for unexpected financial changes, large or small at this point," said Sullivan. "It is imperative that firms understand their cash flow forecasts. Constant analysis of personnel, everyday expenses, and fixed and variable costs are now more necessary than ever."
The study highlights DGC's expertise and in-depth knowledge of the architecture and engineering industries and evaluates financial data from thirty prominent firms in the Greater Boston region, focusing on operational performance metrics and identifying emerging trends. A PDF version of the completed study can be purchased in July for $149.99 online at www.dgccpa.com.
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