Scaling Smart: How Fast Can Your AEC Firm Afford to Grow?

Scaling Smart: How Fast Can Your AEC Firm Afford to Grow?

Have You Ever Heard of Growing Broke?

It sounds counterintuitive, right? You are landing more projects, hiring great people, and scaling up — yet somehow, your cash flow is tighter than ever. Known to some as the "cash desert", this is the reality for many architecture, engineering, and construction (AEC) leaders — navigating the cash flow constraints of running a people-heavy business where payroll goes out every two weeks, but revenue comes in on a much slower cycle — often 30, 60, or even 90+ days later.

Growing without going broke is one of the toughest financial balancing acts in our industry. So, how do you know how fast your company can afford to grow? And what can you do to stretch your growth potential without running out of cash?

Neil Churchill and John Mullins tackled this exact question in their classic Harvard Business Review article, How Fast Can Your Company Afford to Grow?, and Vern Harnish explores similar concepts in Scaling Up. In this article, we will break down key insights from both sources: the cash conversion cycle, sustainable growth rate, the risks of outgrowing your cash, and the levers you can pull to grow sustainably.

The Cash Conversion Cycle: How Long Are You Floating Your Own Growth?

At its core, cash flow is about timing. The cash conversion cycle (CCC) measures how long it takes to turn cash spent (on payroll, materials, and overhead) back into cash received from clients. The longer this cycle, the more cash you need to keep the business running.

The formula is simple:

CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding

For AEC firms, inventory might not be a big factor, but days sales outstanding (DSO) — how long it takes to get paid — is critical. If you are paying employees every two weeks but waiting 60+ days for client payments, you are essentially financing your clients’ projects.

In Scaling Up, Harnish emphasizes the importance of shortening this cycle. Companies that master their cash conversion cycle have a massive advantage: they can grow faster without external financing.

Sustainable Growth Rate: How Fast Can You Grow Without Running Out of Cash?

The sustainable growth rate (SGR) tells you how fast you can scale without needing external financing. Churchill and Mullins define it as:

SGR = Return on Equity x (1 – Dividend Payout Ratio)

Simply put, it is the rate at which you can grow using only the cash your business generates. If you are trying to expand faster than your SGR, you will need to either:

• Take on debt

• Raise prices

• Improve margins

• Speed up collections

If none of those levers move in your favor, you are at risk of growing broke.

What Happens When You Grow Faster Than Your Cash Can Handle?

Exceeding your sustainable growth rate can lead to a financial squeeze. Here is what that looks like:

• More Debt: You borrow to cover payroll and expenses, adding financial risk.

• Cash Crunch: You are constantly chasing payments, struggling to cover operational costs.

• Operating in Crisis Mode: Cash flow strain creates a cycle of fire drills and reactive decision-making, leading to rushed hiring, overextended teams, and reduced focus — ultimately impacting project execution and overall quality.

Many AEC firms fall into this trap when they ramp up hiring before ensuring their cash flow can support it. Churchill and Mullins point out that even profitable companies can fail if they don’t manage this balance.

How to Improve Your Cash Flow and Grow More Sustainably

If you want to grow without cash flow headaches, here are some strategic levers to pull:

1. Speed up receivables. Invoice immediately, offer early payment discounts, and consider progress billing to improve cash inflows.

2. Negotiate better payables terms. Extend payment timelines with suppliers to create better alignment with receivables.

3. Improve project cash flow. Structure contracts with upfront deposits or milestone payments to reduce long cash gaps.

4. Manage overhead. Keep overhead costs lean, especially during growth phases.

5. Retain more earnings. Reinvest profits instead of paying them out — this boosts your sustainable growth rate.

Final Thought: Know Your Growth Limits Before You Test Them

Scaling a business is exciting, but in the AEC world, cash flow is king. Understanding your cash conversion cycle and sustainable growth rate gives you a clear picture of how fast you can grow without running into trouble.

So, before you take on that next big project or hire a new team, ask yourself: Can my cash flow keep up? If the answer isn’t a confident “yes,” it’s time to make some adjustments.

Are you ready to grow your business sustainably? If so, email me at info@odysseyadvisors.us and let’s start doing simple better today.