Focus

Albert Hawkins is the president of a mid-size consulting engineering firm. He and I have been discussing how partners of his generation could build the value of equity in their business — ultimately with a view towards selling it to younger associates.

“You have been arguing for a more corporate way of running our business,” said Albert. “You’ve put forward a management model that was less democratic.”

“With 20 partners, you were having trouble coming to agreement, sometimes on very minor matters,” I replied. “That’s one of the problems running a democracy. Of course, nobody wants to make a wrong choice. But in many cases, the alternatives available are not going to result in very different outcomes. It can be a waste to spend too much time analyzing. Sometimes the best thing you can do is make a decision and move on.”

“The problem I have with the corporate form of governance is that a control clique can take over the firm,” said Harry.

“True enough,” I said. You want to steer a middle path — where a small committee or committees can make minor decisions quickly and efficiently. Then you might want to open up the large decisions for general discussions.”

“The problem is determining what is minor and what isn’t.”

“My thinking is that anything that affects the general development of the firm should be open to discussion,” I said. “Issues that are about cosmetics or costs can be made by fewer people.”

“What do you mean by cosmetics and costs?”

“Cosmetics are appearance issues: the look and location of the office, your corporate identity in brochures and stationery — things that may influence how outsiders will perceive you.”

“That sounds important to me.”

“It is important,” I said, “but will your corporate identity be improved by everyone having a vote? In most cases no. You want enough people on your committees so really bad alternatives are not chosen, but otherwise a bigger committee just leads to a blander look.”

“What about costs?”

“When you’re dealing with ways to control costs or to decide on future purchases, you need to understand the benefits of what you’re buying and the associated expenses. A small committee can usually figure that out. Once past that stage, added people just make the decision harder. So keep the decision group small.”

Albert said, “We have small committees already. What things require a larger consensus?”

“The big thing is firm development. That has two parts. The first is determining where the firm is headed in the future. What specialties, what target markets you will go after. The more people who speak to that issue the better because it’s possible someone will have an interesting take on a future market that no one else has thought of. The second thing — and this is very important — is making your firm more efficient.”

Albert said, “We do work on that. We even have a committee that looks into efficiencies in our processes. Actually we run a pretty tight ship.”

“I’m sure you do. But I’ve been looking over your financial statements for the last five years, and I’ve noticed a negative trend. Your work in process has been growing over the period and so has the time it has taken you to collect your receivables.”

“I know, but it’s difficult to correct. The fact is we keep our headcount lean. Our partners are generating revenue, building work in process up, but they’re a little slow to bill.”

“That explains the WIP, but what about the receivables?”

“There are a couple of issues there. The first is the economy. People are slow to pay. The second relates to the partners again. A customer will call up and say he wants to discuss the bill and it often takes the partner a few days to get back to him. Then the two of them have to iron out the problems. Before we know it, the receivables are 30 days late.”

“There’s a way to solve this,” I said. “This problem usually starts to grow as soon as a partner’s take-home pay isn’t diminished by a drop in cash-flow.”

“You want us to penalize partners if their WIP gets too big?”

“No, I don’t think I could sell that to the firm. I want you to put the focus on cash flow, not on WIP. And I want the admin staff to take over the problem. I suggest that you open up your WIP and receivables numbers to the admin staff. You teach them what the numbers mean, and you set goals on improving them. You provide admin staff with frequent bonuses for hitting those goals. Every two weeks or once a month you institute a firm-wide meeting where you examine WIP and receivables by client. You cheer the staff when they bring in the cash; you put thermometers up around the office to show how they’re doing. You’ll find an enormous improvement in cash flow. The partners and associates will be goaded by the admin staff into helping get out the bills and collecting the ones that are difficult. Your admin people will do a much more focused job of bringing in the cash as well. The whole outlook of the firm will be improved, and write-downs will decline.

“It’s a much bigger idea than it sounds,” I continued. “Partners and associates will begin to focus on getting new business to develop new sources of cash flow. As you know, your WIP is simply your inventory. Turning it over more frequently will increase your annual billings and make those billings easier to collect because they’ll be fresher. That’s a major ingredient in improving the value of your firm’s equity.

Hank Bulmash, MBA, CA is a principal of Bullmash Cullemore, chartered accountants of Toronto.