How Architecture and Engineering Firms Can Communicate Financial and Performance Data to Inform and Motivate, presented by Tom Losey and Greg Anderson

November, 2017


Use of Financial and Performance Data.

  • How to decide who to communicate and share sensitive financial data with.
  • Think about who might have a “right” to this information.
    • Externally
    • Internally
  • Financial Data vs. Performance Metrics

External Users

  • Who requests financial data?
    • Bankers
    • Major Customers
    • Bonding/Project Financing Firms
    • Landlords
    • Equipment Financers
  • Audited or reviewed financial statement
    • Full financials with disclosures
    • Short form financial statement (no balance sheet) with disclosures
  • Internally prepared financial statements

Internal Users

  • Design and engineering firms tend to be owned by professional practitioners
    • Large firms will have a process for considering an individual for principal or shareholder status
    • Smaller firms will also want people to “earn” their way to a principal and/or shareholder level
  • Full financial disclosure is often reserved for shareholders


  • Don’t operations managers or project supervisors need to see financial outcomes?
  • Shouldn’t managers see expense data for the expenses they are trying to control?
  • Does sharing of financial and performance data help with empowerment and “buy in” ?
  • Do ESOP participants deserve full financial statements?

The type of ownership structure you have is important in this discussion

Employee Ownership Structures

  • Regular C Corporation
    • Straightforward ownership model
    • Separation between taxation of corporate profits and gains vs. individual income
    • Gives rise to double taxation of profits and/or gains upon disposition
  • Pass-Through Entities (S Corporation, LLC , LLP)
    • Profits, gains and other tax attributes flow to individual returns (on k-1)
    • Causes more complex tax reporting for all owners
    • Undistributed profits will increase basis, lowering ultimate gain upon disposition and yield a single level of tax on profits and gains
  • ESOP’s can be C Corporations or S Corporations
    • S Corp. ESOPs defer tax on gains until disposition of stock (retirement)
    • Owners selling to C Corp. ESOPs may postpone gains if funds are reinvested
    • Important to note that ESOPs are funded by future profits

For Tax Purposes (a further complication)

  • IRS considers all architectural and engineering firms to be professional service companies (lawyers, accountants, etc. also)
    • Imposes a flat 35% tax rate to avoid “wages” flowing to individuals at low rates
    • This issue is hot right now due to the proposed tax reform (reduced rate not intended for professionals compensating themselves through pass throughs)

Back to Information Sharing

  • As we think about what to share internally
    • Project Information
    • Performance metrics
    • Income statements
    • EBITDA calculations
    • Balance sheets
    • Cash flow statements
  • But…what about highly sensitive information like
    • Compensation related information
    • Owners profitability
    • Debt or leverage factors
    • Value of stock holdings

What Information to Share

  • Performance factors
    • Net Service Revenue
    • Utilization rate
    • Realization rates
    • Net collected rate per hour
    • Other metrics??
  • Full financial statement information is seldom used because
    • Most employees can read and understand an income statement
    • Most employees will not understand/appreciate a balance sheet and related disclosures
    • When you share your income statement (P/L) people typically feel they are getting the financial information they want
  • Many firms are creating Flash Reports or Dashboard Reports that combine key performance and financial information, and show the comparison vs. budgets or expectations
    • Focuses on important data
    • Less data overload

Examples: How some companies distribute financial information

Ellerbe Becket

  • Monthly income statement and narrative
    • Each unit and entire firm
    • Principals (6%) and Associates (20%)
  • Annual Meeting
    • Comparisons: Prior years and forecast
    • Market discussions
    • Stock price
  • Flash Report

Key Metrics

  • Every business has particular key metrics
  • Design Firm
    • Chargeable/billable hours
    • Overtime
    • Net Service Revenue
    • Marketing time
    • Billings
    • Collections
    • Cash/Debt

B. Dalton’s Flash Report

  • Top priority 10 AM fax every Monday
  • Introduced to every employer & client since
  • Actionable information, so people can. .
  • Fix it now!
    • Move work or staff
    • Adjust labor/overtime
    • Close-out projects
    • Collect $
    • Bill
    • Bonus anticipation

People Factors regarding Flash Reports

  • Management must fully embrace the report and its distribution
  • Resistance
    • Time records submitted by 8 AM Monday—no excuses
    • Accountability
    • Don’t single us/me out “We are all one team”…
  • Scoreboard/competition
  • Resisters become complainers when the flash report is late


More information:


Tom Losey, CPA, Partner, Boulay Group



Greg Anderson, consultant and former CFO, Ellerbe Becket




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