For the first four years, Fivecat Studio could be found at a basement studio in our little cottage in the woods of Chappaqua, New York. The space was just large enough for one Dell workstation, a couple of book shelves, a desk chair, a telephone, five cats and me. Each morning I would eat breakfast, kiss Annmarie good-bye and “commute” down 12 steps to Fivecat Studio World Headquarters.
We were 29 years old and life was good.
Annmarie’s studio was in another room on the main level of the house. That is one of the many secrets we’ve learned to stay married all these years (we’ll celebrate 17 years this July). Separate responsibilities. Separate offices. Even today, Annmarie works from her home studio, while I manage the office in Pleasantville.
From that small studio, we built our reputation for highly detailed residential architecture and our “personal touch” customer service. We had few expenses and our revenues were growing healthier each year.
In 2001 our first son was born and, other than feeding schedules and naps, not much changed.
Then, as James grew and life with a child became a reality, we realized that we were going to need a change. We were two young professionals and worked hard to overcome the perception that we lacked the experience to provide services equal to those of our well-rooted competitors. The illusion of an “established architecture firm” gave way to our reality each time a calling prospect heard the the crying baby in the background.
We learned to accommodate our new “partner” and established routines to allow us to keep the firm and our family as separate as they could be within 900 square feet. With several small commercial projects complete and our first major residential project well underway, the business was beginning to grow.
It was time to take the firm to the next level.
We started looking for an office outside the house. Our plan was to find a small space, around 1000 square feet; enough to start hiring a staff and establish ourselves in the local business community. We looked in our village as well as other adjacent towns. We wanted to stay close to home and Annmarie and I knew Pleasantville very well. We lived in an apartment in Pleasantville’s “old village” for a year before we moved to our home in Chappaqua. There we found a perfect space in an old brick office building, which once housed the police department and Village Hall. It met all our requirements; a unique building close to home, 1000 square feet and located in a bustling business district central to all our potential clients.
During the negotiations, the landlord offered us the adjacent office for a rent that we could not refuse. It was well above our budget, but we were optimistic about our future and knew we would quickly fill the much larger space. We took the deal and got to work building out the new Fivecat Studio. We designed the office to have a welcoming reception area with a custom built-in desk, a light-filled conference room, a private office, two toilet rooms, a storage room, a data closet and 1000 square feet of loft-like open studio with 11 foot ceilings. We pulled from our personal savings to add additional custom moldings in the public spaces and fit the toilet rooms with upgraded tile floors. We had big plans and we knew that we would recover the investment very quickly, as clients would soon start knocking on our new front door.
I moved into the private “corner office” and worked there, alone… for almost three years.
We tried hiring and had a few under qualified entry level employees come and go. The reception area never once received a guest and we rarely used the conference room for more than an occasional playgroup meeting for James and his infant friends. We kept the open studio lights off and the HVAC turned down in order to keep the utility bills to a minimum. Each month the bills would be delivered and rent would be due. Luckily business was booming. We kept everyone paid and happy without much problem.
As business grew, so did our staff and eventually the studio was filled with an office manager and three architectural project managers. I had educated myself on business fundamentals and in 2008 we were on our way to our first seven figure year.
Then, the world’s financial markets began to collapse and our economy crumbled. Our rent increased each year, our business expenses grew and we were responsible for a pretty heavy payroll every two weeks. We obtained a line of credit from a local bank to help “manage our cash flow problem” and each month our credit card balances grew.
When Annmarie and I first saw the storm heading our way, we were optimistic. We expected it to be a temporary downturn and carried on with business as usual. We dipped into the line of credit on the months where receivables were low and the credit card balances continued to increase.
We were transparent with our staff about the tough times we were experiencing. We promised that if they worked with us, we would work with them. We called it Survival Mode. We would not reduce staff, if they were willing to reduce their pay. Surely this was a temporary situation and our clients would be back soon. We’d re-establish salaries, refund the line of credit and pay down the credit card as soon as things got better.
It’s now five years later and things didn’t get better. Our office manager and two of our project managers chose to move on.
We did survive and today our boards are full of new work. We have restructured our project management system to allow Annmarie, John (our most loyal associate) and I to work as a team on every project. Our P&L statements are showing signs of life and we have officially entered Recovery Mode.
Survival comes with a price. The line of credit is exhausted, the credit card is maxed out and our original investment spent on the office upgrades is still pending reimbursement.
Bottom line… we hold some major debt.
Build a Debt-Zero Business
When asked for my best advice to emerging professionals and architects considering the launch of a new firm, I say build a Debt Zero Business.
Debt makes you a prisoner to your lenders. It increases your stress and increases the chances of a fatal failure in your business. Debt magnifies your mistakes.
When Annmarie and I realized that a fancy new reception area and a conference room was unnecessary, the money we borrowed from our personal savings made that mistake much worse than if we waited and used retained earnings from the business to pay for the upgrades. Odds are that we probably would have realized that those spaces were unnecessary and could have saved that money for other more important things… like paying our future employees.
Our nation’s banks have worked hard to convince us that we can not live without debt. Our American culture is based on “investing” by borrowing. We are told that we can’t run our businesses without a credit card and a line of credit.
It’s not true.
Dave Ramsey, in his best selling book EntreLeadership
Myth #1: You can’t start or expand a business without debt.
That is simply not true. If we plan, save and wait until we have the money to move to the next level, we spend our money more wisely and make better decisions. It may take longer to get to where we want to go, but when we get there, we will be free from the burdens of paying back the bank.
Myth #2: You need a line of credit to cover cash flow problems.
This was one of my biggest business mistakes. Within one year of obtaining a line of credit, we had the account maxed out. Business never improved from the convenience of withdrawing borrowed money. If I had retained earnings when business was booming, I would have had reserves to cover the slow periods. In residential architecture, the cycle of business is easily predicted. Our phones stop ringing in August and January… every year. We should have money saved to cover those slow times, so a line of credit is unnecessary.
Myth #3: A credit card is a simple way to finance your business.
Dave says, “You can’t earn your way out of stupidity.” I learned that lesson well during this recession. Every time I used the credit cards and could not pay off the balance, I would convince myself that next month would be better. It wasn’t… and my credit card quickly reached its limit.
Myth #4: Large purchases require debt.
Most large purchases are not items urgently needed. Pay cash by saving for the item each month. Open a separate account for the item and pay into the account as if it were an expense. If the item is urgently required, rent it and continue to save until you can pay cash. If you can’t save the required amount each month, you can not afford the loan payments either.
A long term goal of Annmarie’s and mine is to develop our own residential projects. We could use our little cottage in the woods as collateral and borrow the required funds tomorrow, but we’re not. Instead, we are going to save and start small. Maybe we’ll purchase a small house, add some Fivecat flavor and flip it for a profit. Then take the money earned and repeat the process with larger projects until we reach the point where we can build the custom homes we want to offer to the world. We’ll get there, I am certain of it. It will just take longer than I first expected; back when I was ready to risk my home and freedom for quicker returns.
The Count Down to Debt Zero
So, how can we build a Debt Zero Business? Here are 4 step to make it happen.
4. Destroy your credit cards.
I finally decided to cut up my business credit card about a month ago. Instead, I ordered a business debit card, which allows me to pay for items with money that is deducted directly from my business checking account. Not only has this stopped increasing my credit card balances, but it has forced me to be much more focused on how much I spend each month. Credit card money just doesn’t feel as real as money in your bank account.
3. Drop your personal income to a minimum required living wage (if the economy hasn’t already done that for you).
Your primary focus is to eliminate your debt. That requires sacrifice and determination. Dave Ramsey says in another best selling book, The Total Money Makeover
2. Pay a percentage of your net profit to pay off debt each month.
Determine a specific amount, maybe 10%, of your net profit that you will use to pay off your debt. Pay it each month as if it were a business expense. It’s not optional. It gets paid every month.
1. Save a percentage of your net profit to a retained earnings account.
The goal for your retained earnings account is to save 6 months of operating costs. Retained earnings are used for emergencies, business development and for investing in opportunities.
A Debt Zero Business is a strong business. It gives you the freedom to grow and take advantage of opportunities immediately when they become available.
Debt Zero allows you to be generous. With no debt you will have more cash. You can be more generous to your employees and pay them higher salaries.
You can be more generous to your clients and make those small annoying “problems”, which occur during construction, simply go away. This will improve your customer satisfaction, reinforce relationships and lead to more referrals.
You can also be more generous to your community and contribute to local events and fund raisers. Generous businesses are rewarded with a reputation of support and caring for our communities, which leads to positive word-of-mouth and ultimately more business.
What are your thoughts on debt and borrowing money for your business? Do you think it is necessary for a growing business? Do you have a Debt Zero Business? Please share your thoughts.
The more we share, the better this site becomes for all of us.
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I enjoyed your blog on Build A Debt Zero Business! I could identify completely. I started my own business in 1996 with a partner in the basement of my house. My partner left 4.5 years later but I’ve continued to stay in the basement. I’ve had good years and some bad ones. A particularly bad one for me was 2004. I took the last of my money for a draw in June of that year and it wasn’t even enough to be a full draw. No work was coming in. The rest of that year was very painful as I didn’t earn a literal dime in that time, however I DID get the house painted! I had racked up a $12,000 debt on my business line of credit just to make basic payments to keep the doors open. Fortunately my wife had a good job but it still was not enough to cover everything. My two little girls (at the time) heard some conversations at the dinner table based on financial frustrations that I wish today I could have subdued but at the time venting was the only way to relieve the stress. I guess I could have picked a different venue to vent but what was done is done! At any rate, I scored a good job that November; was able to bill on December 1; and finally received the first check in a while in January of 2005. I swore at that time I would never go through that again. I made a committment that January to “tithe” to my own business $500/month and have pretty much stuck with that ritual. One would think that they should have learned as a kid that saving money was an important thing to do, but I simply hadn’t done it. There have been a few little stretches since when I couldn’t afford to add to that account that but generally have been pretty regular with that “payment”. I’ve only borrowed a minor portion of that money on two occassions when I really needed it. Today I’ve amassed nearly $40,000 which I keep in a liquid mutal fund which has been earning on its own at a pretty good clip. Now I don’t want to touch it at all! I’ve found myself without work since last August 2012 with the exception of a couple of small bones that have been thown my way. Something is better than nothing although these are pretty close to nothing! I made enough money in the previous two years that it has allowed me to continue up to this point on regular cash flow without touching my rainy day fund, but it looks like I may need to dip into it soon. But that is what its for! The moral of the story: there is no stress like back in 2004 and this dry spell has been worse! I know I’ve got this big safety net under me that is my money that I can draw from without going in neck deep on a line of credit or any other form of credit. I have a zero balance on my line of credit. I never knew that not having work could feel so good! I know times will get better again, but until then I also know that I can bridge the gap without any pain.
That is excellent advice. “Tithing” to your business. Though the past few years have been tough, I am sure the knowledge that you have retained earnings in the bank is very comforting. That is a lesson many architect need to learn… including myself.
Thanks for sharing your story.
Hello Greg, after reading your story, I’m wondering, ‘why continue in architecture’? Is it a hobby or a business? In most other businesses the owners would have shuttered the doors and moved on to a more profitable venture that can pay the bills. I mean no disrespect, thanks for sharing your story. I’d really like to know your thoughts on why you stick it out.
Gotta love it, Enoch… gotta love it!
Love is the answer.
Mark, in response to your post, not going into debt only works for wealth building if one has significant cash flow (living below means enough that one can put away significant amounts). Unfortunately architects are hampered by low pay, but as you point out in your story, it can be done.
On the last day of our lives what will matter? According to a study by Cornell researchers (and common sense), not money or past business achievements. So I agree with you that you are onto something with your debt-free business. Where there is a will there is a way and there is power in delayed gratification (like your example of waiting to develop until you have cash).
Have you thought about raising the money to develop? This way you aren’t taking on debt but can still share in the rewards.
Do you mean to take on a partner to raise the money? Work with investors?
Investors want a specific return on a specific timeline. The projects that Annmarie and I want to do will certainly be profitable (potentially very profitable), but we want to put the focus on creating something amazing. An investor (unless they are architects) will not understand our priorities.
If development was strictly to have control and make money, I would agree that raising the money may be better than debt… In my opinion : )
Hello Mark. I’m not suggesting that developing is about the money, or control. Jonathan Segal makes it clear that one of his motivations is making a better built environment. Ultimately, that is why I stared BusinessofArchitecture.com and spend so much time on there providing useful content for other architects. It isn’t about the money.
In response to your question, yes, I’m talking about bringing someone on to round out your team and shorten the amount of time you have to wait to develop something. Annemarie and you have the expertise, why not find someone who has the money? My question regards your reasons for waiting instead of pursing this option (something JS recommends).
Truthfully Enoch my issue is more about timing than funding. Very focused on making EA a major influential force in the profession. Development is planned for the next chapter : )
Mark,
I read your blog when your first posted it, and found many of your ideas relevant to me. I have just launched my business, and it is easy to find many ways to spend money!
So I have been thinking about your comments for the past few days and imagining how my business plan would look without going into debt. It is not so hard to revise the vision to be a debt zero business!
Thanks for the insight on what it really feels like to start an architectural office.
I am glad that my thoughts have opened up other possibilities for you. My goal is to show architects that there is more than one way to do almost everything we do. Thanks for sharing.
Before leaving an ivory tower as a business strategist for my drafting table and tool belt, I advised clients on how to grow their businesses. Many business owners came to me asking for assistance in putting together loan packages. I would turn down 9 out of 10 of these people. Money was the last thing they needed, it was a vehicle that would only get them further into trouble. The reasons were multi-fold but the primary one was they did not understand cash flow – the ebb and flow of money into their business. Without a true understanding of how cash flow works in your business, borrowing money OR using savings to float your business is not a viable long-term strategy. Now do not misconstrue, I am an advocate of securing lines of credit for one’s business. But the line of credit should only be used to cover ebbs in cash flow and to allow you to take advantage of discounts on receivables (2/10 net 30 type stuff), in other words for operations NOT capital improvements. Many business owners talk themselves (and their family members) into using borrowed money to purchase the latest and greatest _______ (fill in the blank) because it will make them more productive, more competitive, more something. The reality is that our clients don’t really notice these things, what they notice is our connection with them and their project – something that can not be commoditized with a new computer, reception desk or slick new website. The old adage “you have to have money to make money” is still valid, however, without a clear understanding of how money flows in and out of your business (and a willingness to vigilantly monitor it), you are best served by going the debt free route.
Very insightful comments Molly. Very well stated. Thanks for contributing.
Your point about banks encouraging debt is important. The encouragement you see would potentially be much more beneficial to a publically traded firm. In a privately held small business, however, capital structure decisions are very different. Because a privately held firm cannot go to the stock market and issue new stock or declare a stock repurchase, debt plays a much different role in the capital structure of the firm, and is not so advantageous.
I completely agree that being debt free would relieve allot of stress. But i also agree with Enoch’s comments about needing significant cash flow. I started my own firm about 4 years ago after being laid-off and not being able to secure employment after a year+ worth of sending out resumes all over the country and in several different fields. Starting with no cash and no prospects is a tough way to go. While i have seen growth from one year to the next, i am still not able to pay myself what i would consider a living wage. But i have also been able to avoid any business debt. Before you applaud me on that score though. I have a fair amount of personal debt, mostly from before i was working on my own, but a good deal has been accrued over the last few years as well. I, too, have convinced myself that it will get better. And it has. Just not enough better.
I am currently about 5 months ‘behind’ on paying myself. I keep my overhead very low. About 25% of my income goes to business expenses with the other 75% going to support my family. When comes down to saving my business income for a rainy day or feeding my family, i choose feeding my family, even when that means accruing more debt.
So why do i still do it? A] I love what i do. B] I am good at what i do. C] In my local job market a Masters degree over-qualifies you for any employment opportunity.
Hi Mark,
I have been reading through your blogs since i subscribed to entreachitect and believe me,its been transforming.I nearly lost site of my entire years of training due to situations i have found myself in but this blog has been inspirational and i thank you for the impact you have made.I now really see why the world is so blessed with the Architectural Profession it sure is a calling.
i have also improved on my revenues from architecture because i never used to apply my finaces right with so much skill.Thank you Mark @ keep it going!!
Damn, it is too late to read this article!
It was like remembering my practice, with the big and nice office, the credit line, the survive mode…everything. Even the hopes arrived time to time that new architectural or engineering projects will make us see the light from the end of the tunnel!
It is refreshing to see you are not alone!