David Sullivan, CPA, a Partner and Co-leader of DGC’s Architecture and Engineering practice, wrote an article that was published in BreakingGround Magazine. David discusses the three steps businesses should take to ensure long-term success in a post-COVID-19 world.
BreakingGround is a source of market information for all professionals in the construction and real estate business in Pittsburgh and Western Pennsylvania. It is published bi-monthly by Tall Timber Group on behalf of the Master Builders’ Association of Western Pennsylvania, which is Pennsylvania’s largest AGC chapter. The readers of BreakingGround are the owners, developers, architects, engineers, contractors, politicians and government officials who make decisions about the construction projects in the region.
This article appears in the July/August 2020 issue.
Your Long-Term Success Post COVID-19 Hinges on Doing These Three Things
Over the course of just a few short months, the spread of COVID-19 has affected virtually every aspect of our lives, both personally and professionally. Not only are we all having to adapt to remote work on an individual basis, businesses also face the enormous challenge of figuring out how to advance their strategic objectives in this new reality. Everything from business development and client delivery methods, to training, staff development, and building a strong culture has to be reexamined and reconfigured for the current environment.
And while every business will have to deal with the challenges of re-opening their offices, if you’re an engineering or design firm, there are some particular steps you need to take to help ensure your long-term success. Understanding exactly how the global pandemic will affect your business’s bottom line, responding quickly, and taking the appropriate steps to mitigate any potential risks will be key.
Although the current environment is unlike anything we’ve seen before, there are certainly parallels with the global financial crisis of 2008 in terms of best practices for weathering the storm. Businesses that planned, made decisions quickly and executed well on their business strategy fared better coming out of the Great Recession. Below, I’ve outlined three of the most important things you should be doing right now to help put your firm in the strongest position possible in this environment.
Focus on Financial Forecasting
During any major disruption, whether it’s a market downturn or the current global pandemic, it’s always important to revisit your financial forecasts and recalibrate them to reflect your latest assumptions. That’s true even if your firm hasn’t yet been directly impacted by the current crisis, since there’s always the possibility that it will be affected further downstream.
For example, if you do a lot of work for state agencies in Pennsylvania or local municipalities, it might all be business as usual right now. But bear in mind that things could change once new budgets come out that reflect the effects of COVID-19. If your firm’s focus is on higher education facilities, the pandemic could delay decisions to build new dormitories and academic buildings in the months and years ahead. There are countless examples like these that most engineering and design firms either already are, or eventually will be, exposed to, putting them at considerable financial risk.
The best way to mitigate that risk is to look at your forecasts and adjust your approach accordingly. You’ll want to focus on what the current crisis’s impact has already been, or may soon be, on your future revenue potential so that you have a clear picture of what your cash flow will look like for the balance of 2020 and beyond. Based on that assessment, you may need to make some tough decisions about how you’re spending money.
You may find, for example, that you need to reduce your staffing levels, or temporarily cut back on payroll or benefits. Likewise, although you have probably seen your expenses drop considerably in recent months due to a halt in travel and entertainment, as well as an overall slowdown in marketing and business development activities, now is the time to reevaluate your spending. We’ve just lived through 12 years of economic growth and, if you’re like most firms, you will have added to your overhead costs significantly during that time.
Take a close look at your expense structure and identify where you can trim any fat that has accumulated. Perhaps that means reevaluating the technology you use, your office space needs, or any number of other overhead costs. Finding ways to work leaner and more efficiently will help ensure your ability to weather the downturn.
Ultimately, you need to determine what an acceptable outcome is for your business. If you were targeting a profit margin of between 11 and 15 percent prior to the pandemic (which is the average for midsized engineering and design firms), how will you ensure that you stay at or exceed that level going forward? In the short term, you may need to make some tough choices so that you remain at a healthy level of profitability. Beyond simply controlling costs, you’ll also want to revisit your key performance indicators and come up with a plan for how you’ll attain them going forward if you’ve slipped. The key with all of this work is to have a realistic view of where you’re at so that you can take the actions necessary to keep your business healthy and strong.
Given the urgency of the current situation, let me make one thing clear: Now is not the time to be learning how to create a financial forecast. Rather, you’ll want to partner with an expert who knows your industry, can guide you through the process, and help you focus your attention on the right areas.
Understand the Implications of Government Stimulus
Throughout the crisis, the U.S. government has taken unprecedented action to help sure up the economy, including providing considerable relief for small and medium-sized businesses. One of the most notable steps was establishing the Paycheck Protection Program (PPP), a loan through the U.S. Small Business Administration (SBA) that’s designed to provide a direct incentive for small businesses to keep their workers on the payroll. Other incentives have included making changes to the tax law, such as deferring the payroll tax, introducing retention credits, making changes in how net operating losses can be utilized, and changing how certain fixed asset investments can be written off.
While steps like these have provided a lifeline to hundreds of thousands of businesses across the country affected by the pandemic, they can create challenges as well. There are a lot of new laws and information to understand and there will certainly be more coming. If you’ve accepted a PPP loan, for example, getting that loan forgiven is critical if you don’t want it to become a liability on your balance sheet. Meanwhile, navigating all of the changes to the tax laws will make tax planning this year far more difficult than in the past.
It’s important to ensure you achieve the best financial outcome for your business by understanding these new programs. In many cases, that will mean making sure you are working with a financial and tax advisor who understands what new legislation stands to benefit you the most, and how best to take advantage of it.
Plan for the Long Term
Leadership, incentive compensation programs, and succession planning have long been challenges for engineering and design firms, and they promise to only become more important going forward. Figuring out how to transition your organization to a new generation of leaders is critical for its long-term success. All the more so given that some of your senior staff who are Baby Boomers may be exiting your firm in the coming years, leaving you with a gap in potential leadership.
If you don’t already have a succession plan, it’s time to put one in place. You’ll need to have honest and upfront discussions with any leaders who will be exiting and those who are looking to move up in the firm over the next one to five years. It’s important to create detailed plans that cover both the financial impacts of anyone’s exit from the firm as well as how their responsibilities will be transitioned to others. And, even if you already have a plan in place, now is a good time to reevaluate whether it still makes sense in this new environment.
A few years back, I had the pleasure of helping Pittsburgh-based Gateway Engineers implement a succession plan that brought a third generation of ownership to the firm. As part of the process, we developed a generational model which addressed leadership, ownership, and related financial planning considerations that helped provide a future vision and a clear path for their key stakeholders. Gateway’s CEO Jason Jesso had this to say about the experience; “The plan we put in the place in 2015 is one of the reasons why we’ve been able to make our way through the current pandemic so successfully. It has helped us bring up our next generation of leaders, while giving everyone a clear view of our long-term vision, both of which are critical in times like these.”
Navigate the Road Ahead with Confidence
While taking the right steps to weather the current environment may seem daunting, the good news is that you don’t have to go it alone. Make sure you have the right advisor to partner with and to give you the expert advice you need to navigate your way through these uncertain times. Challenging times like these call for a dynamic approach to leadership and a high level of flexibility. Every engineering and design firm is going to need to pay attention to the information that they have in front of them, make sense of it all, and be able to respond quickly. Wait to do so, and you’ll be at a real disadvantage.
David Sullivan, CPA is a Partner at DGC (DiCicco, Gulman & Company LLP), an accounting and business advisory firm with a dedicated A&E practice serving clients across the United States. David is a frequent speaker and contributes articles to business and trade publications on topics such as tax strategies, succession planning and M&A strategies. David can be reached at 781-937-5351 / firstname.lastname@example.org.
You can also visit DGC's coronavirus web page at dgccpa.com/coronavirus which is frequently updated with new resources to help you deal with the financial impact of the coronavirus on you and your business.
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