The Principals Academy
Day One
JUNE 2022
About Zweig Group
• Established 1988, sold in 2004, bought back in 2012 • Re-branded from Zweig White in 2015 • Focused solely on the architecture, engineering, planning, environmental consulting and construction industry. • We come from your industry! • Three times named to the Inc. 500/5000 list of the fastest growing privately held companies. • We are here to make you more successful – as individuals and companies.
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About Zweig Group
elevate the industry
celebrate promote diversify educate change
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Jamie Claire Kiser Managing Principal and Director of Advisory Services Zweig Group
Phil Keil Principal and Director of Strategy Zweig Group
Will Swearingen Principal and Director of Ownership Transition Zweig Group
Meet your Instructors In order of appearance
Dawson Fercho Partner & Founder Corporate Tax Advisors
Director of Research & E-Commerce Zweig Group Christy Zweig Niehues
Principal, Start 2 Rise Strategic Training and Advisory Partner Zweig Group Justin Smith
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Agenda – Day One
TITLE
INSTRUCTOR
START END
WHAT IT MEANS TO BE A PRINCIPAL
KISER
8:30 9:30
9:30
STRATEGIC AND BUSINESS PLANNING KEIL
10:30 10:45
BREAK
10:30
DRIVING FINANCIAL RESULTS
SWEARINGEN
10:45
12:00
LUNCH/TAX CREDITS
FERCHO
12:00
1:00 2:30 2:45 4:30 6:30
MARKETING AND BUSINESS DEVELOPMENT NIEHUES
1:00 2:30 2:45 5:00
BREAK
RECRUITING AND RETENTION
KISER
OPTIONAL HAPPY HOUR
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Agenda – Day Two
TITLE
INSTRUCTOR
START END
PROJECT MANAGEMENT
SMITH SMITH
8:30
9:30
LEADERSHIP FOR PRINCIPALS
9:30 10:30
BREAK
10:30 10:45
OWNERSHIP TRANSITION AND M&A
SWEARINGEN
10:45 12:00
LUNCH
12:00 12:30
ZOOMING OUT: LEADING SUCCESSFUL FIRMS
KISER
12:30
1:00 2:00
PRINCIPALS ROUNDTABLE
ALL
1:00
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Let’s get to know each other
• Name • Firm • Role • What would you like to get out of this course? • If you weren’t attending this seminar, what would you do with a day in Miami?
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What It Means To Be A Principal
Principal Demographics
What percentage of principals are owners in their firms? a. 50% b. 72% c. 89% d. 95%
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Principal Profile
22%
23%
Equity concentration
11%
Non-owner 0.1%-9.9% 10%-24.9% 25%-49.9% 50%-99.9% 100%
11%
12%
19%
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Principal Profile - Demographics
Caucasian - 88% Asian - 6% African American - 1% Hispanic 5%
Female - 17% Male - 82% Unspecified - 1%
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Principal Profile - Demographics
In your opinion, how much diversity does your workplace have?
No Diversity 4%
A Lot of Diversity 33%
A Little Diversity 25%
Moderate Diversity 38%
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Principal Profile
• 82% of principals are registered professionals • 40% of principals have no college-level business education • 24% of principals do not believe they received adequate training before becoming a principal
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Principal Demographics
What percentage of principals are less than 40 years old?
a. 4% b. 8% c. 10% d. 15%
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Age of Principals
Principal Profile
41%
• The median hourly billing rate for principals is $200 • On average, principals are 32% billable • Typical work week = 50 hrs • 81% frequently or occasionally work on weekends / holidays
20%
4%
30-39 40-49 50-59 60+
35%
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Principal Profile
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Ownership in an AEC Firm
41%
Borrowed money to purchase stock.
Didn’t buy as much stock as they were offered. Principals who thought not buying all stock offered shows a lack of commitment or belief in the firm.
15%
85%
0%
25%
50%
75% 100%
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Ownership in an AEC Firm
Signed a personal guarantee for some or all of their firm’s debts.
49%
Feel that the risks and rewards of ownership are well balanced.
46%
Believe the rewards outweigh the risks.
43%
0%
25%
50%
75%
100%
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Ownership in an AEC Firm
Signed a non-compete agreement (typical 1-2 year term).
46%
Have a buy-sell agreement with their firm.
71%
Have their stock value tied to how they leave the firm.
32%
0%
25%
50%
75% 100%
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Ownership Strategies
57% of firms carry life insurance on owners
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Ownership and Leadership
Ownership should not be a seen as part of the career ladder!
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Management Issues
• 21% of principals feel there are other principals in the firm that abuse their position and do not pull their weight. • 33% of principals would NOT choose the same partners if given the chance to do it all over again.
• 62% of firms have NEVER fired or laid-off a principal in their firm’s history.
• Only 38% of principals are subject to regular performance appraisals
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Organizational Structure
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8
6
3
0
1-24
25-49
50-99 100-249 250-499 500+
# of people who report to me directly
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Board of Directors
Profile of AEC firms: • 66% of firms have a board of directors • Typical # of seats: 5 • Only 26% of firms have external board members • Typically meet 4 times per year
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Board of Directors What a board should do:
• Primary responsibility is a fiduciary one - to maximize return on investments for the firm’s shareholders • Governing the organization by establishing broad policies and objectives • Selecting, appointing, supporting and reviewing the performance of the CEO • Ensuring the availability of adequate financial resources
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Top challenges for principals
1.Staff recruitment and retention 2.Ownership transition 3.Business Strategic Planning 4.Business development/marketing 5.Communication and Time Management
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What are the greatest challenges for your firm?
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Only 41% of firms establish any specific minimum eligibility criteria for becoming a principal Pathway to Principal
• Of those that do, criteria focus on the following:
– Years of experience: 35% – Marketing experience: 27% – Education minimum: 25%
– Professional registration/licensure: 65% – Business development/sales abilities: 62% – Project management experience: 58% – Staff management responsibilities: 54%
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Pathway to Principal
• Of those firms that use experience:
– 12.4 years of career experience is the average to become an owner
– 7.2 years with the firm is the average to become an owner
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Characteristics of a principal - Not just for owners!
• Role model. • Responsibility is to the firm first • Every “principal” has different responsibilities – There is no one job description for principal. • Honesty and a strong sense of ethics including a strong work ethic.
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Characteristics of a principal - Not just for owners!
• Discretion and confidentiality • A collaborative spirit • A desire to learn about and help the firm • Tolerance for cautious risk-taking
• Leadership skills • Financial Literacy
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Characteristics of a principal - Not just for owners! • Higher expectations for what you will contribute as a principal. • Creativity. • Excellent communication skills.
• Team Mentality - can lead and be a part of a team. • Influencer Ability to bring work into the firm and feed others.
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Characteristics of a principal - Not just for owners!
• Understand the importance of value creation. • Responsibility for all of the firm employees. • Understand risk vs. reward with ability to take risks. • Big-picture thinking about the company overall
vs office / department. • Long-term thinking.
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WHAT IT MEANS TO BE A PRINCIPAL
Questions?
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UP NEXT: Strategic Planning with Phil Keil
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Strategic Planning
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High performance AEC firms are…
Executing a strategic G R O W T H plan that…
Aligned around a mission and vision and embracing a shared set of values
Effectively balancing competing pressures put on them by clients, employees, and owners.
• Capitalizes on strengths • Differentiates themselves in the marketplace • Creates and maintains a sustainable competitive advantage • Is SMART – specific, measurable, attainable, realistic, and time-bound
Operating with thoughtful policies, practices and procedures – broadly communicated and understood – that can scale without breaking
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Types of Planning
There are many planning processes. The hierarchy is presented here and how they inform each other.
Strategic Plan
► Strategic plans provide purpose and direction for accomplishing the firm’s goals in the mid-long term horizon. It focuses on values and aspirations. ► Business Plans are about the details of how the strategy is executed. How will you accomplish what you set out to do in the coming year? ► The marketing/BD plan is one component of the business plan.
Business Plan
Marketing/BD Plan
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Strategic planning: An overview
Strategy is a set of goal directed actions a firm takes to gain and sustain a competitive advantage.
A competitive advantage is always relative, never absolute. It defines the best way for a firm to create value for its stakeholders, both internal and external.
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Poll
What percentage of the workforce, on average, does not understand an organization’s strategy?
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Poll
What percentage of the workforce, on average, does not understand an organization’s strategy?
95%
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Poll
What percentage of firms with a formal strategic planning process outperform their peers?
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Poll
What percentage of firms with a formal strategic planning process outperform their peers?
70%
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Poll
How much more profitable are firms using strategic plans?
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Poll
How much more profitable are firms using strategic plans?
12%
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Strategic planning - Just the stats
PROFITABILITY
EXECUTION
UNDERSTANDING
TIME SPENT
95%
70%
12%
86%
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Cynical? We get it.
“It’s been 5 or 6 years since we developed our plan and I’m not sure where we are on those action items”
“I have seen our strategic plan but it is 75 pages of text and I have too much to do to try and decipher it”
“We have a strategic plan, but nobody follows it”
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Why have a plan?
We need roadmaps if we are to build a legacy or purpose driven organization.
Builds a common sense of direction aligning your entire team with your firm’s vision, mission, values, goals, and culture. Guides your future helping make the firm more sustainable, able to withstand market fluctuations and other “threats.” Reduces the stress of owning and operating a business enabling the firm to maximize resources and avoid wasting time, effort, and money on activities that are not profitable, or are holding the firm back.
Builds confidence with lenders, creditors, investors, and employees. Trains employees in how your business operates and makes money.
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Strategic & Business Planning development
• Definition of markets being pursued. • Client research.
• Competitive research. • Employee research. • Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis. • Financial modeling (pro formas, balance sheets, cash flow, stock value). • Org charts. • Realistic budgets for everything from recruiting to training. • Other back up materials and exhibits.
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5 Strategic Planning Frameworks
• The balanced scorecard – great for larger organizations who want to ensure their goals cover the main aspects of a successful business. • The Ansoff Matrix – great for organizations who are about to embark on an aggressive growth strategy and need help defining their plan of attack. • McKinsey’s Strategic Horizons – Great for organizations who have decided that innovation is a crucial part of their strategy. • Value Disciplines – Great for organizations who are looking to fundamentally reposition themselves in their marketplace. • The Stakeholder model – great for organizations where stakeholders are the core of what they do, such as non-profits.
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Strategic planning framework
Vision – Why do we exist? Mission - Our core purpose. What are we doing to achieve our vision?
Values - How do we do things? Unwavering principal’s that through action define our culture. Objectives - statements that indicate what is critical or important in your organizational strategy. Strategies - What are the basic philosophies that guide us in critical business areas? Initiatives - What are we going to do? Specific programs, procedures, or programs. Goals – How will we measure performance? Actions - Who, what, when, where, why, and how?
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The framework in action
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The framework in action
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Zweig Group’s MVV
To be the leaders in driving performance and purpose for the AEC industry MISSION
VISION
CORE VALUES Remastering is our mantra : Lead with curiosity, choose to be gutsy, make a difference Hustle is our method : Forge your own way, step up and own your actions, figure shit out Grace is our way : Celebrate often, remain open, be politely persistent
Elevate the industry
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Vision
Definition: An aspirational description of what an organization would like to achieve or accomplish in the mid-term or long- term future. It is intended to serve as a clear guide for choosing current and future courses of action. In other words, A vision statement is an articulation of a view of the world that your company and your people are working towards (A just cause/purpose), not what they are expected to do now. It is a vivid picture of where you are headed to motivate others to take that journey with you.
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Vision
“Dominate the day to create tomorrow”
“We will be a highly respected national design firm consistently providing leadership, expertise, innovation, and entrepreneurial thinking.”
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness. That to secure these rights, governments are instituted among Men, deriving their just powers from the consent of the governed…”
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Mission
Definition: A written declaration of an organization's core purpose and focus that normally remains unchanged over time. Properly crafted mission statements (1) serve as filters to separate what is important from what is not, (2) communicate a sense of intended direction to the entire organization. In other words, this statement is intended to describe what we are doing to achieve our vision. The difference in the two being that the vision is a description of an end state and the mission is what we are doing to get there.
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Mission
“Make the world a better, safer place.” -Miyamoto International
“Provide a culture that inspires people to deliver exceptional results.”
“Building and connecting our communities.”
“We the People of the Unites States, in Order to form a more perfect Union, establish justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”
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Values
Unwavering principles that infuse culture with purpose or fundamental beliefs that guide a person's decisions.
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Strategic planning framework
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Strategic Objective
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Goals – SMART and DUMB
▶ SMART - Specific, Measurable, Achievable, Relevant, and Time Bound. ► “Win ‘Best Firm to Work For’ each year.”Values - How do we do things? Unwavering principal’s that through action define our culture. ► “40% of revenue from non-land/site development in 5 years.” ► “Client feedback study shows ‘responsiveness’ score of 4.5/5.0 each year.” ► “Develop a firm-wide training program tied to career progression with a budget in 2019 to implement by Q2 2020.” ► “Win two national design awards annually.”
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Actions
► The single most important thing you can do to affect change and to advance your firm is execution. That’s where the actions come in. ► As a leader, you must play a role in this and aid the CEO in the execution of your strategic plan (so you better know what it is). ► This is the weakest part of the strategic planning process.
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Strategic plans should be growth campaigns
Marketing supports and promotes the plan
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Implementation Science
Prism, EPIS, CFIR, Behavioral Theories, Diffusion of Innovation, Organizational Readiness for Change… the list goes on.
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Change Management Models
MODEL
DESCRIPTION
BENEFITS
LIMITATIONS
PURPOSE
Steps to encourage new behaviors for successful organizational change
Kotter’s Change Management Model
Provides an eight step, actionable checklist
Lack of measurement processes and time consuming
Organizational change management model
Strategies for managing the emotional transitions of change
Includes a step by step guide to foster emotional acceptance
Not a framework for operational change
Organizational change management model
Bridges Transition Model
Model to define the change adoption timeframe
Defines a timeline for workforce change acceptance
Not a framework for operational change
Organizational change management model
Rogers’ Tech Adoption Curve
Model based on the emotional journey - five stages of grief
Most change frameworks address these stages
No clear guidance on operational change
Individual change management model
Kubler-Ross Model
Five step process: Awareness, Desire, Knowledge, Ability, and Reinforcement
Rewards individual change in organizational change process
Cumbersome process for large organizations
Individual change management model
Prosci ADKAR Model
Seven structural model that focuses on holistic approach to change
Provides guidance and focuses on the whole organization
Organizational change management model
McKinsey Model
Very complex
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Change Management Models
MODEL
DESCRIPTION
BENEFITS
LIMITATIONS
PURPOSE
Method advocating the benefits of behavior modification
Positive reinforcement method to drive individual change
Depends on a custom response to each change circumstance
Individual change management model
Nudge Theory
Individual leadership development through adopting better habits
More leadership within rank and file to drive organizational change
No framework for operational change
Individual change management model
Stephen Covey’s Model
Model for improving family relationships
Focus on the family as a unit rather than individuals
No framework for operational change
Individual change management model
Virginia Satir
Techniques and examples on three interconnected elements of change Six steps - Envision, Activate, Support, Implement, Ensure, and Recognize
Good overview/stories for modeling change
No framework for operational change
Individual change management model
Switch Framework
Checklist on operation and emotional elements to organizational change
Relies on leadership effectiveness and response
Organizational change management model
EASIER Model
An ongoing process advocating “plan, do, study, act”
Structured framework for organizational change
No process to factor emotional resistance or opposition forces
Organizational change management model
Deming Cycle
Simple steps to combat emotional resistance and opposition
Three steps - unfreeze, change, and refreeze process of change
No mechanism for ongoing change
Organizational change management model
Lewin’s Model
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Executing your plans effectively
► Be open to change – Unless firm leaders are sufficiently open and willing to consider all options, nothing will get done. ► Think and act holistically – Always have the big picture in sharp focus and have it lead your daily actions. ► Be nimble – Be willing to adjust along the way when new environmental conditions (political, market, competitive, etc.) or data suggest to do so. ► Develop a system and process – ensure that you approach the build and implementation in a structured way. ► Local ownership – push accountability, decision making, and implementation authority as far down the org chart as possible. ► Use the plan often – Everyone needs to know it and understand it.
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What you should be doing today ► Know everything in your strategic plan. ► Make business planning a yearly activity. ► Set goals, track results, share information, and continually make changes based on the data. ► Use planning documents and goals in reviews/meetings. ► Rethink everything continuously. ► Grow with intention!
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Phil Keil Principal | Director of Strategy pkeil@zweiggroup.com
Questions?
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Up next: Driving Financial Results with Will Swearingen at 10:45
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Driving Financial Results
1. Financial literacy 2. Finance and accounting departments 3. Driving financial performance in your AEC firm 4. The Contract to Cash process
Financial Management
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Why do you need to know this?
Finance and accounting is the language of business Principals are business people–not just technical people Proper internal controls require that not just the finance and accounting staff understand the numbers
The business of architecture and engineering supports the profession of architecture and engineering
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FINANCIAL LITERACY
Financial Statements
The three main financial statements: • Income Statement • Balance Sheet • Statement of Cash Flows They are used by: • Management and Board of Directors • Lenders
• Creditors • Investors
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Income Statement
Guiding Principles Revenue is recognized when the activity that generates it is fully or essentially complete. There must be a level of certainty that payment will be received. Expenses associated with the revenue should be booked to the same time period 01 02 03 04
• Revenue (Sales, or Income) • Expenses • Net Income (Profit) (= Revenue – Expense)
The income statement describes activity over a period of time
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Income Statement Cont.
Net service revenue (NSR)
•Many firms use the services of specialty sub-consultants •Typically, firms bill the services of the sub-consultants to the ultimate client. •NSR is the revenue of a firm that is attributable to the effort of its own employees. Direct and reimbursable costs are those expenses that can be specifically attributed to a project. Examples include
•Direct labor: employee time that has been associated with a client project •Meeting travel, report reproduction
Indirect costs are those that cannot be specifically attributable to a project. They are also referred to as overhead costs. Examples include:
•Indirect labor: employee time that is not associated with a client project •Corporate insurance •Team building events
“People Costs” represent more than 60% of the total costs of an AEC firm
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Balance Sheet
Guiding Principles 1. Assets are “things” that the company owns that have economic value (cash, property, equipment, patents, etc.) 2. Liabilities are moneys owed to others 3. Net worth or book value = assets minus liabilities
Assets Liabilities Shareholder Equity (Net Worth)
-
=
The balance sheet shows the net worth of a company on a certain date
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Balance Sheet
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Statement of Cash Flows
Reports on the flow of CASH that results from: • Operating Activities (the business) • Investment Activities (buying assets with future economic benefit) • Financing Activities (creating liabilities)
CASH FLOW IS A DISTINCTLY DIFFERENT CONCEPT FROM ACCRUAL ACCOUNTING
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Statement of Cash Flows Cont.
• Understanding the difference between accrual accounting and cash accounting is important
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Accrual accounting - recognizes revenue when earned or billed and expenses when incurred or billed . Cash basis accounting - recognizes revenue when collected and expenses when paid . METHODS OF ACCOUNTING
JANUARY 1
THROUGHOUT YEAR
NOV 30
A firm is founded and capitalized with $500,000 of the founder’s own money
The founder hires people and works on a client project. The firm spends $490,000 on payroll and other things
The firm invoices its client in the amount of $750,000!
The firm shows an accrual-based profit for the year: $750,000 in revenue and $490,000 in expense = $260,000 in profit! On a cash-basis, the firm showed a loss of $490,000! The client hadn’t paid the invoice by Dec 31. With $10,000 in the bank, what is the founder going to do?
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DISCUSSION
Does your firm regularly share financial information? What financial information is shared with you and the other members of your firm?
DID YOU KNOW? 82% OF ZWEIG GROUP’S “BEST FIRM TO WORK FOR” WINNERS SHARE REVENUE DATA WITH ALL EMPLOYEES, COMPARED TO 23% OF ALL AEC FIRMS OVERALL.
DISCUSSION
What does “revenue” mean at your firm?
• When you charge time to the job? • When you invoice?
• When you get paid?
ORGANIZING THE FUNCTION
Things to be done
There is a lot to be done… • Time/hours must be tracked • Client invoices need to be generated, and payment there of tracked • Inbound bills need to be processed and paid • Employees need to be paid • You need to know how much cash you have so you don’t run out • You have to complete income tax returns (federal, state, local) • You have to comply with a host of other administrative details that require financial information Insurance Business licenses Government procurement The larger the firm the more complex it gets!
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Growing the finance & accounting functions
100-250 Total Staff Financial management and accounting break out Firms are adding a CFO
< 50 Total Staff Accounting and finance function handled by small staff with high level of Principal and PM involvement
50-99 Total Staff
Firms start adding a Controller
Taking on some debt Considering merger & acquisition activity
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Roles & Responsibilities
Accounting focuses on historic review and nuts and bolts of running a business.
Financial management focuses on predictive measures and goals
Strategic financial management is the link between daily activity and overall firm direction.
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Roles & Responsibilities
Billing, AR and collection staff – billing and collection, project contract management. AP staff – payments to vendors and sub- consultants. Payroll staff – handles payroll. Accounting manager – general ledger. Controller – manages accounting staff, responsible for historic reporting functions. Treasurer – manages staff responsible for the management of cash CFO – financial strategy of the firm, banking and credit relationships, capital structure.
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The financials themselves are also organized
“Profit Centers” are the units of the business that management expects to contribute to the bottom line (profit) of the company. Revenues and expenses are tracked for the profit centers. There are many ways to organize profit centers inside a company’s financial system. Geographic profit centers (Dallas, Fort Worth). Market sector profit centers (education, healthcare, airports). Discipline-based profit centers (civil engineering, mechanical engineering). Understanding how your firm is organized financially can tell you a lot about incentives, pressures, etc.
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DISCUSSION
How big is your finance and accounting department? How does your company organize itself financially? What finance and accounting system does your firm you use?
DID YOU KNOW? 82% OF THE FIRMS RESPONDING TO ZWEIG GROUP’S FINANCIAL PERFORMANCE SURVEY USE A DELTEK SYSTEM (VISION, VANTAGEPOINT, OR AJERA). 7% USE QUICKBOOKS
DRIVING FINANCIAL PERFORMANCE
Excellent financial performance is a team sport
The challenges: Getting the staffing leverage right Calibrating the company financially Getting the cash to flow
Allocating capital wisely – creating value
Everyone has a role to play in delivering desired financial outcomes And everyone should benefit from excellent financial performance
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Calibrating and Monitoring Performance
Operating metrics • Net Multiplier
• Utilization • Overhead
Income Statement
• Revenue Factor Profitability metrics • Pre-tax, pre-bonus profit on NSR • EBITDA Liquidity metrics • Current Ratio • ACP Growth and Predictive metrics
Balance Sheet
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The fundamental determinants of profitability
Net Multiplier Utilization Overhead Revenue Factor Revenue (NSR) Direct Labor Indirect Labor Other Expenses Total Expenses Net Income (Profit) Profit % on NSR
3.00 60.0% 150.0% 1.80
• Net Multiplier • Utilization • Overhead
$ $ $ $ $ $
10,800,000.00 3,600,000.00 2,400,000.00 3,000,000.00 9,000,000.00 1,800,000.00 16.67%
• Net Service Revenue • Direct Labor Cost • Indirect Labor Cost • Other Expense
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Net Multiplier
Net Multiplier = Net Service Revenue Direct Labor Cost
• The actual mark-up that firms achieve on direct labor costs. • Most firms have a target multiplier – their standard billing rates are constructed using it. • The income statement shows realized Net Multiplier. • High net multipliers are signals of pricing power and fee discipline
Fast Growth Firm Median
Very High Profit Firm Median
2017 2018 2019 2020 2021
Survey Median
3.02 2.81 3.04
3.08 3.08 3.17 3.09 3.02
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Utilization (or Chargeability)
Utilization = Direct Labor Cost All Labor Cost
• The ratio of direct labor cost to all labor cost • Includes the indirect labor cost of traditionally “non-billable” personnel. • Influenced by not only the utilization of project staff, but the number of (and compensation of) those non-billable staff.
Survey Median Very High Profit Firm Median 60.8% 60.4% 66.7% Fast Growth Firm Median
2017 2018 2019 2020 2021
61% 62% 60% 62% 61%
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THE PRINCIPALS ACADEMY 2022
Revenue Factor
Revenue Factor = Net Multiplier x Utilization = NSR / Total Labor Cost
• A hybrid metric • Recognizes that – for a given number of staff people – there are two ways to increase profitability all other things being equal • Have everyone work more billable hours (increase utilization) • Charge more for each hour (increase net multiplier)
Fast Growth Firm Median
Very High Profit Firm Median
2017 2018 2019 2020 2021
Survey Median
1.80 1.77 2.03
1.83 1.84 1.86 1.90 1.80
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THE PRINCIPALS ACADEMY 2022
Overhead
Overhead = Indirect Labor Cost + All Other Indirect Costs Direct Labor Cost
• The ratio of indirect costs (including labor) to direct labor cost • Can include bonus expense – useful to measure including and excluding • Data below excludes bonus expense from calculation
Survey Median Very High Profit Firm Median 144% 138% 131% Fast Growth Firm Median
2017 2018 2019 2020 2021
154% 167% 164% 159% 144%
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THE PRINCIPALS ACADEMY 2022
-Multiplier, Utilization, and Overhead are the dials you turn to calibrate profitability. -Your multiplier is limited by the competitive environment you’re in – it’s not practical to think you can charge as much as you’d like -Utilization and Overhead
Generating Accrual Profits
Increase Net Multiplier and Utilization by 5%
Increase Net Multiplier by 5%
Increase Utilization by 5%
Base Case
Net Multiplier Utilization Overhead Revenue Factor Revenue (NSR) Direct Labor Indirect Labor Other Expenses Total Expenses Net Income (Profit) Profit % on NSR All Labor
3.00 60.0% 150.0% 1.80
3.15 60.0% 150.0% 1.89
3.00 63.0% 138.1% 1.89
3.15 63.0% 138.1% 1.98
$ $ $ $ $ $
$ $ $ $ $ $
$ $ $ $ $ $
$ $ $ $ $ $
10,800,000.00 3,600,000.00 2,400,000.00 3,000,000.00 9,000,000.00 1,800,000.00 16.67% 6,000,000.00
11,340,000.00 3,600,000.00 2,400,000.00 3,000,000.00 9,000,000.00 2,340,000.00 20.63% 6,000,000.00
11,340,000.00 3,780,000.00 2,220,000.00 3,000,000.00 9,000,000.00 2,340,000.00 20.63% 6,000,000.00
11,907,000.00 3,780,000.00 2,200,000.00 3,000,000.00 9,000,000.00 2,907,000.00 24.41% 6,000,000.00
$
$
$
$
103
THE PRINCIPALS ACADEMY 2022
Profitability Metrics
EBITDA, defined as earnings before interest, taxes, depreciation, and amortization, is a metric used to evaluate a company’s operating performance. It can be seen as a proxy for cash flow. It adds those four items back to a firm’s net income
Pre-tax, Pre-bonus Profit Margin on NSR
Survey Median Very High Profit Firm Median 15.6% 17.2% 22.4% Fast Growth Firm Median EBITDA Margin on NSR Survey Median Very High Profit Firm Median 16.3% 18.4% 23.5% Fast Growth Firm Median
2017 2018 2019 2020 2021
14.6% 12.7% 13.9% 15.0% 15.6%
2017 2018 2019 2020 2021
16.0% 14.2% 16.3% 16.7% 16.3%
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THE PRINCIPALS ACADEMY 2022
Current Ratio
Current Ratio = Current Assets Current Liabilities
• The current ratio measures the ability of the firm to meet its short-term (less than one year) current liabilities with the conversion of current assets (including accounts receivable, work in process, and cash). It is the measure of the firm’s liquidity. — the higher it is, the greater the ability of the firm to meets its obligations and withstand a decline in revenue (and future cash flow)
Fast Growth Firm Median
Very High Profit Firm Median
2017 2018 2019 2020 2021
Survey Median
2.64 2.59 3.12
2.13 2.83 2.51 2.45 2.64
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THE PRINCIPALS ACADEMY 2022
Average Collection Period
ACP = Accounts Receivable Annual Gross Revenue/365
• Measures how quickly revenue is turning into cash • Expressed in terms of days • Using trailing 12 months revenue keeps number current
Fast Growth Firm Median
Very High Profit Firm Median
2017 2018 2019 2020 2021
Survey Median
71
64
67
75
77
70
70
71
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THE PRINCIPALS ACADEMY 2022
Growth & Predictive Metrics
Firms typically measure growth rates of revenue, net service revenue, and profit
They also peer into the future Backlog – the dollar value of work under contract but not billed. What do we know is in front of us? Prospective project pipeline / leads / sales funnel. What else do we think is in front of us?
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THE PRINCIPALS ACADEMY 2022
DISCUSSION
What metrics do you have regular access to? What metrics are particularly important to you or your firm? Do you know what your firm’s revenue and profitability targets are?
DID YOU KNOW? IN 2021, FIRMS WERE TARGETING PROFIT MARGINS BETWEEN 10% (LOWER QUARTILE) AND 16% (UPPER QUARTILE). THE MEDIAN PROFIT MARGIN TARGET WAS 13%.
CONTRACTS TO CASH
Getting the cash to flow
A firm can be structured to create profits – but not generate enough cash to actually pay for things. You cannot run out of cash The process of turning people’s time into a cash collection is one (or should be one) of the most important processes at your firm.
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THE PRINCIPALS ACADEMY 2022
How does a project become cash? • Orders/jobs are booked • Work is performed or subbed out • Work is completed • Timesheets are submitted • Invoices are generated • Invoices are approved by project managers • Invoices go out • Invoices from subs come in
• A/R is booked for the invoices from firm to the client • A/P is booked for the invoices to firm from subs • Cash is collected from the client • Subs are paid, firm is paid, and we move on to the next project!
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THE PRINCIPALS ACADEMY 2022
Managing the cash to flow
• Working capital is a metric that represents operating liquidity. It includes current assets such as cash, AR, WIP, minus other current liabilities.
• Getting billings out the door faster and collection of accounts receivable are the most important elements of managing cash flow for the typical firm.
• Reducing your firm’s average collection period begins at home (meaning stuff you can control!), including managing scope, time sheets, reviewing billable vs unbilled time, speeding up the invoice draft/approval process, bringing more NSR in house vs subbing it out, and improving WIP.
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THE PRINCIPALS ACADEMY 2022
The project to cash process
Contracting – Establishing Scope , Fee, Schedule and Payment Terms
Doing the work – Managing staff and sub-consultants and delivering output
Generating Invoices –
Collecting Payment - Diligent, persistent follow-up
Paying Sub-consultants
Timesheets, Sub invoices, Drafts, Finals
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THE PRINCIPALS ACADEMY 2022
Contracting
Contracting – Establishing Scope , Fee, Schedule and Payment Terms
Generating Invoices – Timesheets, Sub invoices, Drafts, Finals
Doing the work – Managing staff and sub-consultants and delivering output
Collecting Payment - Diligent, persistent follow-up
Paying Sub-consultants
Weak contract language and scope definitions set your project up for problems before you even get started. A tight scope makes it easier to identify out of scope requests and allow you to protect your margins and provide a consistent client service approach. Make project descriptive language tight and consistent in all forms of communication –proposals, interview, contracts, team meetings, project reports, etc. Clarify the billing process right up front. Who gets invoices? What format does the client require? What other requirements exist (like registering as a vendor or using a portal). Get those details into your billing system. Ask for retainers – especially from new clients. You won’t get one if you don’t ask.
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THE PRINCIPALS ACADEMY 2022
Doing
Contracting – Establishing Scope , Fee, Schedule and Payment Terms
Generating Invoices – Timesheets, Sub invoices, Drafts, Finals
Doing the work – Managing staff and sub-consultants and delivering output
Collecting Payment - Diligent, persistent follow-up
Paying Sub-consultants
Communication amongst the project team is key –surface problems early and do what you said you were going to. Understand the difference between good (or great) client service and scope creep Get change orders moving quickly.
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THE PRINCIPALS ACADEMY 2022
Invoicing
Contracting – Establishing Scope , Fee, Schedule and Payment Terms
Generating Invoices – Timesheets, Sub invoices, Drafts, Finals
Doing the work – Managing staff and sub-consultants and delivering output
Collecting Payment - Diligent, persistent follow-up
Paying Sub-consultants
Timesheet discipline is essential!
Get them done on time, so that errors can surface AND so that the process can commence.
Tune the invoice review and approval process to the culture of your firm
Put dates on calendars – timesheets posted, drafts generated, finals generated, all invoices sent
Drive the process with your subs. Ask them for their invoices early.
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THE PRINCIPALS ACADEMY 2022
Collecting
Contracting – Establishing Scope , Fee, Schedule and Payment Terms
Generating Invoices – Timesheets, Sub invoices, Drafts, Finals
Doing the work – Managing staff and sub-consultants and delivering output
Collecting Payment - Diligent, persistent follow-up
Paying Sub-consultants
Milestones (after invoice sent) 7 days – Accounting confirms receipt
Disciplined, consistent follow-up is required
30 days – Accounting sends duplicate invoice 37 days – Accounting follow-up with phone call 45 days – PM follow-up 60 days – Principal follow-up 90 days – Stop Work
Having a company policy and process helps
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THE PRINCIPALS ACADEMY 2022
Paying Sub-Consultants
Contracting – Establishing Scope , Fee, Schedule and Payment Terms
Generating Invoices – Timesheets, Sub invoices, Drafts, Finals
Doing the work – Managing staff and sub-consultants and delivering output
Collecting Payment - Diligent, persistent follow-up
Paying Sub-consultants
Model the right behavior. Make sure you pay your subs immediately after you get paid.
Don’t solve your cash flow problems off the backs of your business partners
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THE PRINCIPALS ACADEMY 2022
DISCUSSION
How does the Contract to Cash process work at your firm? What information are you given to make the process work? What is the one thing you could do to most impact the process?
DID YOU KNOW? 62% OF FIRMS SURVEYED FORECAST THEIR CASH FLOW. OF THOSE THAT DO, THE MEDIAN LOOK AHEAD PERIOD IS FIVE MONTHS.
Will Swearingen Principal | Director of Ownership Transition wswearingen@zweiggroup.com
Questions?
How Designers Qualify for the R&D Tax Credit
Congress’ Definition of R&D How Designers Qualify for the R&D Tax Credit
Presented by: Dawson Fercho, EA Corporate Tax Advisors
R&D TAX CREDIT. // 122
Meet Your Presenter, Dawson Fercho, EA
⟫ IRS Enrolled Agent − Admitted to practice before the IRS ⟫ 20 Years of Experience − Small and mid-size businesses ⟫ 16 Years Exclusively Focused − Federal R&D Credit − 179D Energy Efficiency Deduction. ⟫ Co-Founder, Corporate Tax Advisors
R&D TAX CREDIT. // 123
Agenda
R&D Overview R&D Definition Examples of the Computation Important Rules Qualifying Activities Contractual Risk
R&D TAX CREDIT. // 124
Credit for Increasing Research Related Activities
Generates Immediate Cash Flow
Permanently Codified January 1, 2016 Established 1981
01
02
Minimize tax liability
SECTION 41 OVERVIEW
Pay down federal/state tax liabilities $1 for $1 Tax Credit
Reduce the high cost of labor Intent
04
03
06
05
4 Open to all tax paying entities Sole, S-Corp, C-Corp, PSC, Partnerships Eligibility Not eligible: Fully owned ESOP S. Corps. & Non-Profits
Four-year look Timing
R&D TAX CREDIT. // 125
Be Aware
Design Life Magazine 2015
The Research and Development (R&D) tax credit is one of the most substantial incentives under current U.S. tax law for the A/E industry. Unlike a standard deduction, it is a dollar-for-dollar credit against your tax liability. )
Innovation begins with a design
Designers are by nature and
Innovation is seeing what is not working and initiating change
profession, innovators
R&D TAX CREDIT. // 126
What’s on a CFO’s Mind
Mergers & Acquisitions
Risk Management
Profitability
Overhead
Strategic Plan
Growth
R&D TAX CREDIT. // 127
Economic risk is required
What Does this Actually Mean?
At 10% Pretax Margin
At 20% Pretax Margin
At 30% Pretax Margin
Cash Flow (from R&D credit) Est Tax Rate 26% (fed/state)
$50,000
$50,000
$50,000
26%
26%
26%
Revenue Required (to generate cash flow)
$675,676
$337,838
$225,225
R&D TAX CREDIT. // 129
High-Level Estimate- Mental Calculation
1 Determine Total Annual W2 Wage Expense
25%X’s W2 Wage = Qualified Research Expenses
2
7.5%X’s Qualified Research Expenses = Annual net Federal Tax Credit
3
#3X’s 4 =‘s Total Federal Credit Benefit for Open Tax Years 2019-2022
4
R&D TAX CREDIT. // 130
Qualified Research Expenditure
IRC Section 41 – The development of a new or
SUPPLIES Expendable materials consumed
improved business component, i.e., new or improved designs.
WAGES Typically, largest component. Calculate the % of employees’ qualifying time/hours Multiply this % by annual wages per W-2
CONTRACTOR Same pro-rata rules as above. Only 65% of qualifying costs eligible.
R&D TAX CREDIT. // 131
The Four-Part Test
ELIMINATE UNCERTAINTY
TECHNOLOGICAL
EXPERIMENTATION
NEW/IMPROVED DESIGN
Principals of Science Engineering Physics Chemistry Biology Computer Sciences
Products Process Software Techniques Formulas Inventions
Endeavoring to discover information uncertain at outset
Evolution of design, trial and error
Evaluating one or more alternatives
Appropriate and final design
R&D TAX CREDIT. // 132
The Quick Test What does Congress consider to be R&D?
The Quick Test
Question #1
Question #2
Did you do anything today considered neck-up, using your
Did you attempt the above in an effort to make something better? New/Improved
head towards a product/service- based problem?
R&D TAX CREDIT. // 134
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