Between the avalanche and the cliff.
As a director of a solo or small practice it often feels like we’re living between an avalanche and a cliff.
We’ve got the avalanche on one side we’re one or two new projects away from being inundated with work; think late nights, hasty recruiting, shortcutting project work. On the other side is the cliff; projects wrapping up, or falling over for one of a million reasons and cashflow drying up; taking on bad projects out of necessity, cutting costs and downsizing.
Finding out where you are sitting between the avalanche, the cliff and some safe, level ground between the two can help you understand whether to prioritise taking on more projects or increasing your team’s capacity. It can also just help you sleep better at night. Cashflow and staff management are among the top stressors for a small practice director.
This article gives you two simple metrics — one for spotting a cliff (too little work), one for spotting an avalanche (too much). Neither is perfect, but they're good enough to protect your practice — and your sanity.
For a long time I was trying to find our whether I was sitting on safe ground through gut, intuition and a lot of mental maths. How many jobs do I have on the go? How long do I have until invoicing runs out? For how many months will I be able to hit payroll? How many more projects do I need to win to sure up the year?
Then i started tinkering with a few straightforward metrics to put my mind at ease. They’re quite simple. They’re certainly not perfect. But I found them quite useful, and I hope that you will too. I’ve outlined my thinking below, but if I’ve lost you in the numbers, I have a demo spreadsheet available to download so that you can read along and tinker with your own scenarios.
The Cliff
The cliff is probably the more constant of the problems. Most directors I know always have one eye on the projects, one eye on the cliff. It’s also more intuitive and probably easier to quantify. This is how I do it.
Add up the following:
Money you have:
cash on hand
savings in other business bank accounts
total amount of invoices you’ve sent you that you’re waiting payment on
total billing for active project phases (eg if you’re in concept for project A, don’t count DD here)
Money you’re counting on:
total billing committed for future project stages (eg, if you’re in concept for house A, count DD, Doco here).
any potential projects that you’re at least 80% sure you’ll win, (estimated fee if you haven’t issued a proposal)
From this subtract any upcoming fixed costs you have. You might have BAS (in Australia) or tax bill due next month. You might have committed $2,500 to photographing a recent project etc.
This subtotal is money you have in the business. Now lets find the cliff.
Calculate your monthly expenses. This like:
your lease, software
insurances
salaries + super, etc.
Now divide your money in the business by your monthly expenses. This tells you how long you’ve got until you’re falling off that cliff. Let’s call this ‘best case scenario’.
For added peace of mind do a second calculation – we’ll call it ‘worst case scenario’. What if that new project you’re sure of doesn’t come through? What if your favourite clients decide to pull the pin after concept ‘cause they just bought a new house anyway (yes, this happened to me! So calculate cash on hand, savings invoices and fees for current phases only. Nothing else.
When to get worried about your cliff will depend on a few factors such as; how many opportunities for new projects do you get, how often do you convert these, what’s your average fee per project, do your projects often go the distance or do they fall down early in the process, how comfortable are you with risk?
For you, your worst case scenario might be a cliff of 3 months. If you’re well under, start cranking up your marketing and new business plan into overdrive. Your best case might be six months. If its significantly longer you might need to keep an eye out for the avalanche.
The Avalanche
This one is harder to spot and on the surface feels like less of a worry, but it can creep up on you if you’re not following it.
Too much work coming in can be a bit harder to calculate, but let’s try this approach. If you calculate your fees based on one of the following traditional methods (percentage based, lump sum, hourly rates) you’ll likely calculate your avalanche based on a few factors. Crudely, take the total number of fees you are projecting to work on over the next three months. Now, give each project an ‘allowance’. Take, say a concept design fee you have for $25,000. You might think the brief is pretty straightforward and you have a clear process mapped out, you might give the project an allowance of $15,000 (given you $10,000 profit off top). Do this for all of your projects – a documentation project you have that has been dogging you might be given an allowance closer to, or even higher than your budget. Add up all of your ‘allowances’ for the next three months.
Now lets take your fee allowance (if you’re solo practitioner this is easier to do, if you have a few staff members use a composite hourly rate - see below) and divide it by your hourly rate. This will give you an estimated number of hours required to complete your work over the next three months.
Finally we’ll look at your capacity to do that work. Calculate your staff’s FTE capacity. Then calculate the number of hours you and your team will be working over the next three months. Finally look at your utilisation rate (roughly what percentage of time will you be and your team be working on billable projects). Multiply these to get your total billable hours for the next three months.
Finally divide your Estimated Hours to Complete by your total Billable Hours. This will give you a Load to Capacity Ratio. A number below 1.0 means you have excess capacity forecast. A number over 1.0 means you have more work than capacity. I’d say a safe and profitable number is between 0.8 and 1.2.
This doesn’t need to tell you if you’re ready to hire yet. I’d play with different scenarios. If you’ve just sent out a really large fee proposal, add that into your calculation to see how it impacts your capacity. Or, if you think a client is on the fence about proceeding after concept, take that fee out and see how that impacts your capacity.
These two tools are crude and rough and imperfect. But they should give you a way to understand whether you have the right number of projects for your practice, or the right number of staff.
Composite hourly rate
I mentioned a composite hourly rate above. If you have a student, a graduate and a project architect working with you they’ll likely all have different charge out and cost rates. Take the average cost rate for all of your staff. Use this as a composite hourly rate. It gets a bit harder to calculate if the following are true:
Your staff work different FTEs (you might be full time, your student one day a week)
Your staff have different utilisation rates (you might only spend 50% of your time on billable hours, your grad might be 90%)
It doesn’t need to be perfect. A quick weighted average based on your team's size and role is enough to make this tool useful
Closing
Its better to catch a cliff or an avalanche when it's a speck on the horizon — not when it's right in front of you. These simple metrics should help you spot it when its still far enough away that you can do something about it.