The area of finance may not seem relevant to risks associated with design firms, but this includes borrowing money to meet payroll, investments the firm has made, employee benefit plans, and aging accounts receivables. It is a constant balancing act between project budgets and overall firm financial performance.
Average Revenue Per Employee
While it does have limitations, this ratio provides a gauge to a company’s productivity and financial health. The revenue-per-employee ratio provides a broad indication of the health of an operation. A high revenue-per-employee figure indicates that a company can operate on lower overhead costs, and, therefore, do more with fewer employees, which often translates into healthier profits. Discipline-specific benchmarks should be used when comparing your firm’s ratio.
When a claim occurs and a deductible must be paid, this unexpected expense can cut deep into profitability. Cash flow can vary greatly from month to month and while a design firm may appear to be profitable on paper, cash flow dictates the firm’s ability to meet its financial obligations. Properly matching deductibles to a client’s unique cash flow is a critical part of the risk management process. This even includes deductible types, such as straight self-insured retentions to deductibles that include “first dollar” defense coverage.
Managing Accounts Receivables
A key component to positive cash flow resides in how the design firm manages accounts receivables. Design firms should collect money within 60 days of the invoice date. Invoices exceeding 90 days must be pursued for a quick resolution. Particularly in down economies when many firms have cash flow issues and draw out their own payments, there is risk in suing clients for the collection of fees. Staying on top of your firm’s average aging of accounts receivables is one way improve cash flow and therefore overall firm profitability.
Alternative Risk Management Financing
Risk financing makes funds available to pay for losses and risk control measures or makes up for cash flow variability. Risk financing can be broken down into 2 segments: Retention and Transfer. “Retention” is the risk financing technique that makes funds available from inside the design firm to pay for losses and manage cash flow variability. “Transfer” is the technique in which the design firm shifts financial consequences of specific losses to a 3rd party. This can be done through insurance, contract (indemnification) language and hedging.
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