Practice Management Member Conversations

I teach the Professional Practice course at the Boston Architectural College.  A student asked me this week if there was a rule of thumb or practice standard for the amount amount of cash reserve or operating cash a firm should maintain in order to properly manage a firm.

I have my own opinion re: this, but I would welcome any other thoughts, opinions, comments or suggestions for further research on this topic.

Thank you.

Donald Hunsicker, AIA
Head, School of Design Studies
Boston Architectural College

Good question.  It takes disipline for a firm to get to the point of having a cash reserve, with profit margins so slim.  I think a well managed firm should look to three resources for managed cash flow.  First accounts recievable, next cash on hand (including a reserve fund) and finally a bank credit line.  The sum total should be about 2 months operational expenses.

The two months expenses give one the ability to adjust expenses and staffing levels to meet the forseable work back log.  Obviously this is more important when backlog is low and the work horizon is short (4 months or less)  and while not less important - a bit easier - when horizons are longer.

A cash reserve is not ment to hold out to the bitter end, but rather dampen cash flow so staffing and other resources adjusted appropraitely to anticpated back log.


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Arthur Kjos AIA
Clark/Kjos Architects, LLC
Seattle WA
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Great discussion.

We have simple formula that we follow, which was developed when interest on a accounts and CD's actually existed.

1.  We keep about 2 weeks expenses in an operating account, which we use as our daily checking account.

2.  We keep three months of regular expenses in a money market account, which at one time, earned a higher interest than our operating account.  We transfer funds as needed into our operating account.

3.  Reserves in excess of 3 months of expenses are invested in CD's.  Our goal is to have a CD expire every 3 months, and we either roll it into another CD, or transfer to one of our two cash accounts.

4.  We track our CD's into different funds; excessive operational funds, year end expenses, long term firm investments, and retiring partners stock purchasing.

We have operating accounts in multiple banks to ensure full FSIC insurance coverage. 

These are our goals and we do our best to follow.  However, at times such as these, having any reserves is a great goal.
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Curtis Wilson AIA
PIVOT Architecture
Eugene OR
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Well, not as sophisticated as the other answers, I will offer the following which, not totally surprising, lines up with one of the answers below:

Not a sophisticated answer either, but there are two (additional) ways of looking at the cash reserve:

a. Monthly cost versus months of subsistence based on available cash.
b. Hours required to finish all the projects currently engaged, versus available cash reserve to do so.

Whereas b requires more calculations, they both provide realistic survival scenarios, which are the basis for the best recommendation: build a year of cash reserves, no matter what the size of the firm, cutting back on profit sharing until accomplished.

Like Mr. Glisson, we invoice very similar amounts with similar costs. Having a reasonable cash reserve has really made a difference in fronting economic contractions where our industry is the first to slow down and one of the last to recover.
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Sergio Amunategui AIA, LEED AP
Architect
Amunategui Barreau, AIA Architects
Santiago

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Original Message:
Sent: 09-13-2010 04:59
From: Robert A Glisson
Subject: Cash Reserve

Well, not as sophisticated as the other answers, I will offer the following which, not totally surprising, lines up with one of the answers below:

We are a small firm of 9 people, we bill about 1.2 million a year, usually 100-140K per month.  Our expenses average about 80-90K per month.  We try to keep anywhere from 140-200K in our account.  Through experience, we have learned to become concerned when our account reaches 140K.  If it drops to 100K, we usually act by making plans etc.  Obviously, we also take into account our receivables and how likely we are to get them in a timely manner.

On the plus side, if we get to 200K in the account, we usually pay out bonuses!  Hopefully this helps by applying numbers to some of the general rules listed below.

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Robert A Glisson AIA
Rojo Architecture
Tampa FL
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What recommendations can you offer to start-up architectural practices to generate a healthy cash reserve.

Perspectus Architecture is a firm of 25 with two offices. Our accountants and our own opinion is to run with three months payroll as a cash reserve. We have found that the most important aspect is maintaining this is to have your accounts receivable within 30 - 40 days.
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Lawrence Fischer AIA
Architect
Perspectus Architecture, LLC
Cleveland OH
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