This week I am very happy to share a guest post written by Steve L. Wintner, AIA, Emeritus, an architecture management consultant and co-author of the book, Financial Management for Design Professionals: The Path to Profitability
Steve presents to us a relatively simple step to becoming significantly more successful. After reading the entire article, please share thoughts in the comments below. Have you already established these policies? Will you be making changes in how you document and manage your time?
Let me know what you think…
The Timesheet Discipline
Where can a firm principal find the answer to: “What must I do to create the future prosperity of my firm?”
It might be difficult for many to believe, but there are many reasons that one of the least complicated, least thought about, of all of any professional design firm’s administrative resources, is also a critically important financial firm resource. A source in which, I believe is the answer to this question. At least it’s a place to begin. And, as we all know, “all great journeys begin with the first step”.
The firm resource I am referring to is of course, the much ignored and maligned Timesheet – when is the last time you entered your time on your timesheet?
My experience has taught me that far too many firms regard this resource as ‘something that can essentially ‘be ignored’ until the last minute (Ok-maybe the last hour, for some of you) before it is to be completed and submitted (electronically or manually) to the Accounting Department, or to whomever the firm’s policy has identified as the party responsible for collecting these completed forms.
Therein, lays a potential negative impact on a firm’s financial prosperity. With many years of evaluating both small and large firm issues, such as: contending with low productivity, little or no profits and so many flawed notions of why these issues exist, I can assert with confidence that it is more likely related to the lack of a disciplined time management policy or just laziness, or both.
As design professionals, most of us are not educated, trained, nor have an affinity for administrative systems such as accounting and/or financial management or any desire to be involved in monitoring these ‘soft’, non-project activities. Sadly, like it or not, those who are in a position of ‘firm leadership’, a minimum, if any, amount of time is devoted to learning how to understand the nuances of these activities, but more importantly, how to effectively manage them.
A small percentage of design professionals may have taken graduate courses in business administration and/or have developed a working knowledge of accounting and financial management. However, the time lapse between graduating and finding oneself in such a leadership position will likely require the need to take refresher courses to be ready to function effectively in these areas.
The Timesheet as a Critically Important Financial Resource
To support my assertion that the Timesheet is one of the most important financial resources of every professional service/design firm, we only have to consider the components of a firm’s accrual-basis, Profit/Loss Statement (P-L), which includes a section defined as, ‘Total Direct Labor (Salary) (TDL)’. This dollar figure represents the cost of the total of all hours charged to all active projects during any defined statement period. This total dollar figure is calculated on the basis of each person’s hourly salary rate (annual salary/2080 hours) multiplied by the number of hours charged to any active project. TDL is also the denominator in calculating two of the ‘Key Financial Performance Indicators’ (KFPI) of the P-L: the ‘Net Multiplier’ (NM) and the ‘Overhead Rate’ (OH). Once the OH is accurately calculated, it is only then possible to determine a firm’s (and any project’s) ‘Net Profit’. For every professional design firm this is their ‘Bottom Line’.
When the hours spent are eventually charged to projects, if they are entered as anything less than timely and accurate, it will negatively impact the reliability of the TDL figure, which in turn will create an unreliable calculation and perception about each current project’s ‘true’ profitability. These inaccurately recorded hours will also set-up a ‘domino effect’ that will subsequently affect the reliability of the calculation for these two aforementioned KFPI’s: the Net Multiplier (NM) and the Overhead Rate (OH).
Applying these ‘flawed’ metrics to the development of future project fee proposals, will over time, also impact the reliability of the calculation of the firm’s ‘true’ Net Profit and the firm’s financial condition for the current P-L Statement and Balance Sheet period and ultimately for the entire year.
Clearly, the continued reliance upon this type of flawed, financial performance data could result in a firm’s inability to accurately establish the firm’s Overhead Rate, Break-even Rate and the billing rates for each employee. This would make it difficult to arrive at a targeted profitability percentage for future project fee proposals and the opportunity to further enhance the financial resources of the firm.
In the long-term, this will also impact a firm’s future affordability to allow additional expenditures for promotions, salary increases and the distribution of performance-based profit-sharing bonuses for all contributing employees.
In consideration of the negative impact on these long-term potential benefits, it seems obvious that getting everyone, from principals down to the newest intern employee, to embrace such a discipline would be a wise business decision. Why then is the timely and accurate completion of a timesheet such an endemic problem in our profession? The two best answers I can offer, from my experience, is primarily a lack of awareness about the importance of how and when time is captured by all members of a firm and, as I previously said, just plain laziness.
Both of these ‘obstacles’ can easily be overcome by a firm’s principal/owner establishing this disciplined protocol as a new firm policy, setting an example for the rest of the firm and by providing a simple, step-by-step training session for all employees on how and when timesheet entries are to be completed and submitted.
For all of the above reasons, it must now be clear that the lowly Timesheet does in fact play a critical role in the stability of a firm’s financial resources.
For those firms who have already recognized these benefits and have implemented such a program, I acknowledge the wisdom of your decision and encourage you to continue to seek and develop more ways to lessen any resistance to this program and enhance the financial resources of your firm.
An Introduction to ‘TheMattox Format’
The discipline of a time management process is one of the ‘cornerstones’ of a system I developed and continue to expand and refine, that has its roots in two seminal writings by Robert F. Mattox, FAIA (retired), in the late 1970’s and early 1980’s. Mattox’s writing’s, were first published by The AIA Press in 1978 and 1980. These two volumes were respectively titled: ‘Financial Management for Architects’ and ‘Standardized Accounting for Architects’. These volumes by Mattox, which are GAAP-compliant, were developed to serve as an alternative to conventional, A/E accounting formats and designed specifically for use by professional design firms.
The time invested studying and scrutinizing these two volumes, became the primary focus for my professional development, continuing education workshop for The AIA, titled: ‘The Path to Profitability’. I made my first presentation in 1993 at the AIA National Convention in Chicago.
The financial components developed for the workshop were based upon the material included in Mattox’s two volumes. From that material, I made certain adjustments to the format of the financial reports, with Robert’s full agreement and approval. In deference to Robert’s writings, I respectfully refer to these adjusted financial components as ‘The Mattox Format’ (TMF). The financial components of TMF includes: a Chart of Accounts, an accrual-based P-L Statement and a Balance Sheet Report. These financial components, along with accurate, timely completed and submitted Timesheets, enable professionals design firms to quickly and easily ascertain the firm and each project’s profitability and then to calculate 11 KFPI’s; seven from the P-L and four from the Balance Sheet.
While conventional, A/E accounting systems are also capable of providing these same financial reports and performance indicators, the results require a certain amount of interpolation and re-organizing to calculate.
My professional experience with these conventional A/E systems has shown that they do not necessarily provide results, as accurate as TMF for some of the KFPI’s. The reason for this? In my opinion, these conventional A/E accounting systems are not as effectively or efficiently formatted as TMF and include several unrelated and distorting data, which skews the Bottom Line results and consequently, the KFPI’s. .
The significant difference between TMF and any conventional A/E accounting system is the structure of its Chart of Accounts and the format of the two, major financial reports; the accrual-basis, Profit-Loss Statement and the Balance Sheet, based on their respective TMF Chart of Accounts.
Although TMF is not widely known or recognized by most accounting professionals, the method has nevertheless proven to be beneficial to many professional design firms. TMF is currently only available in one of the three remaining, integrated A/E accounting software systems developed for professional design firms. Unfortunately, at this time, that version is no longer functionally capable of accurately producing TMF financial reports.
The Protocol of a Time Management Discipline
Getting back to the oft-maligned and greatly misunderstood Timesheet; if a timesheet is not completed in a timely manner (at least once each working day) before the person leaves the office for the day, the hours on the timesheet will at best be an estimate and at worst, a ‘SWAG’.
For anyone working on multiple projects and multiple tasks and phases of different projects (think ‘small firms’) completing an accurate daily timesheet will require discipline and in larger firms, a specific firm policy and procedure. In these situations, the hours spent in the morning before leaving for lunch should be entered onto the timesheet. This process should be repeated again, just prior to leaving the office for the day.
The use of a ‘Time Log’ ,or ‘Diary’ would go a long way to assist in making accurate timesheet entries for the hours spent on each project, phase and task and enhance the veracity of the financial reports and KFPI results.
If an employee’s daily project assignment consists only of one project, then completing the timesheet at the end of the day would be an acceptable option. Nevertheless, it would still be my strong recommendation to consider entering time spent, twice every day. Once, just before taking a lunch break and then again just before departing for the day. This would ensure an accurate record of the actual time spent. The level of accuracy in reporting time spent could mean the difference between prosperity and eventual demise. The availability of a firm policy that both establishes clear guidelines and provides training for all members of the firm, will result in a disciplined, time management system and an enhancement of the firm’s future prosperity.
Steve L. Wintner, AIA, Emeritus, became a licensed architect in 1968 and retired from active practice in 1985. In the course of his career, Steve served as the managing principal of a small firm partnership and later as the VP/Director of Operations for two of the largest architectural firms in the country. In 1985, now retired, he started his second career as a management consultant, with a commitment to make a difference in the professional design industry by assisting other design professionals achieve their goals through his body of knowledge and experience in as a managing architect.
Steve’s commitment has lead to developing a series of professional development workshops which have been presented to national, state and local AIA components since 1993. His financial management workshop, ‘The Path to Profitability’ became the basis of the book he co-authored with Michael Tardif, Assoc. AIA, Financial Management for Design Professionals: The Path to Profitability
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Photo Credit: Pixabay.com / SplitShire
As a sole proprietor, I can never muster the discipline to keep logs of anything other than my billable time — yet I know it’s the nonbillable hours that are holding me back. I use Time Master on my iPhone but starting a time entry is just cumbersome enough to be a deterrent. What other apps are people using and loving?
John, as a sole proprietor, I can totlally empathize with your situation.
As it is with starting anything new, especially something that needs to become a ‘good practice habit’, i prefer the KIS principle; “Keep it simple”.
Any manual/electronic-digital means of logging your time at the conclusion of each project activity and the start of each new project activity is the first step. The same discipline needs to be applied to capturing as accurately as possible the time spent on non-project activities. Having these entries in ‘writing’ will begin to make it easier, over time, for you to recognize how to better manage your time each day.
There’s just no easy way, except to make a commitment and get started. The rewards will soon prove your effort worthwhile.
I wish you every success.
Respectfully,
Steve
I love the depth of your article and the way you handled things. It’s like what Aristotle had quoted in the past regarding giving yourself success by giving yourself a daily habit. Success isn’t really isn’t something we should expect to be given straight to us. It takes time and practice to get there. I’m aware of the troubles of time management when balancing my work life with my pleasure. So many factors come into mind, and we’re all only given 24 hours to get them all done. I described a few time management strategies here if you’d like to check them out: http://www.michaelgregoryii.com/2014/10/15/developing-time-management-skills/ But overall, I just wanted to say that I totally agree with you. Pretty much just make a good habit out of what you do and you’ll find the success that you’re looking for.
Michael, thank you for your kind words and acknowledgement. For whatever reason, we, as people, seem to think that time will somehow always be available to us and we need not expend much effort in managing that invaluable, irreplaceable resource. Your article covers this issue well and what you suggest are excellent ways to help us control the issue of ‘runaway’ time.
There are sevral other excellent sources of how to become a better time manager. Stephen R. Covey’s best-seller, “The 7 Habits of Highly Effective People” has an excellent discussion of learning the distinction between the implications of what’s ‘important’ and what’s ‘urgent’ and how to set your priorities once this has been established. Also, John C. Maxwell has written extensively on how leaders can learn to manage their time more effectively, in “Leadership 101″and “The 21 Most Powerful Minutes in a Leader’s Day”.
One of the best and most efficient time management concepts I ever learned was to ‘only do what only I can do” and delegate the rest to qualified others. This came out of a workshop I attended almost 40 years ago. In this workshop they discussed the issue of ‘Monkey Transference’. This occurs when someone comes up to you and says, “we have a problem”. That signifies this person is about to transfer the monkey from his back to your back. The solution to avoid such an incident is to be sure that those around you, at home or work, or otherwise, understands that you are not in the business of solving their problems. If they choose to approach you with a problem they have, they need to understand that you will only listen to their problem if they also have several options for how they might solve their problem. Then listening to what they have to say could be a productive exchange and all you have to do is listen an encourage them in solving their problem. For them, talking it out with someone else will likely provide greater clarity as to the right solution than if they just kept it locked in their minds. And you will not be a victim of Monkey Transference.
Respectfully,
Mr. Wintner knows his stuff. I used the Standardized Accounting For Architects to figure out the accounting stuff in a small partnership in the late ’70s. He is right-on about time sheets.
Where I disagree with him is that calculating 11 Key Financial Performance Indicators is a distraction. I would recommend spending the time on business development rather than collecting historical data that you often can’t do anything about. Over 80% of architectural firms are smaller than 10 people. They need improved business development rather than improved accounting, except of course for timely time sheets, which don’t cost anything.
Thank you Rick for your alignment with me on the importance of accurate timesheets.
As to the KFPI’s, why should it be an either or? Both functions serve the firm, just in different ways. As a example, the preferred and best way to properly develop a break-even rate and billing rate for every employee is to be able to accurately calculate the firm’s overhead rate; one of the seven KFPI’s from the accrual-basis P/L. Until you know the firm’s ‘true’ overhead rate, determining the firm’s (and project) profitability will at best be a SWAG.
Marketing and principals focus on BD, while accounting staff and PM’s focus on metrics to determine proposed, project fees.
Being awarded a project is only beneficial to the firm if it is capable of producing an acceptable profit. the only path to that kind of profitability is by way of a financial management system and the KFPI’s that come from its reports.
Respectfully,
Steve, in the context of firms of 20 or more employees, I completely agree with you. But that is only 7% of all US architectural firms. As you appraoch 20 people in size, you might be able to swing it. But for 80% of us, there is just the principal(s). There aren’t enough man-hours in a year for a financial management system that goes beyond calculating your overhead rate once or twice a year.
Rick, your point is well-taken. We seem to have digressed to a different topic than the discussionof timesheet discipline. Nevertheless, I believe this is an exchange of ideas worth sharing with others who frequent Mark’s Blog posts. So I will add my comments and then perhaps we can continue this exchange via email.
The majority of my clients, like the make-up of most U.S. architectural firms are small, between 3 and 20, as you point out. As long as there are employees, the calculation of KFPI’s is essential and like most things, relative. From my POV, each new RFP the firm receives will set in motion the development of a project fee budget to properly calculate what will be their proposed fee. Having their current metrics, especially, as you say, their overhead rate available will enable them to better develop this proposed fee.
The majority of my clients review their financial reports (accrual and cash) once a month. Generally, I am asked to review these reports as well and calculate their metrics for them. It’s worth their expense (built into my fee basis) to have me do this and send it to them. I agree, calculting these metrics once per quarter may be all that is necessary and each client can choose that option. None of this however, in my opinion, precludes the importance of a principal having an accrual and cash basis report ‘available’ to them every month, or quarterly, as they deem appropriate.
Thank you again for your excellent comments.
Respectfully,
You are welcome to continue the discussion here. I feel it is beneficial for others to read and understand your thoughts, whether or not it is relevant to the current post.
Mark, thank you for affirming the value of the exchange between myself and Rick and other design professionals. Much appreciated.
Having spent nearly 40 years as an Architect, I have used many different types of Time Recording. The value of capturing Timesheet Data cannot be underestimated. It is one of the most important resources of any Practice!
How do you know how to bid for work when you don’t know how much it costs to do it? Over the years I have worked for organisations where there has been NO Timesheets whatsoever, through to Accountant Led Organisations insisting upon Six Minute Reporting – The same as in Law Firms. Needless to say, the former no longer exist and the latter have had to create a Job Number for ‘Filling-In Time sheets!’
Increasingly, many Clients and their Project Managers insist on carrying out a Timesheet Post Mortem once a Fee Account has been lodged for payment – Or more commonly, just before the due date of payment.
My Fee-Earning Productive Staff are exactly that! And, I try as far as possible to keep them focussed on what they are best at.
Timesheet Information is collected each morning at a Daily Team Briefing. Much of this is done verbally, and recorded by a member of Support Staff who maintains all of the Job Costing Records. From Timesheets and Expenses Information, data is entered into a JOBCOST Record. Financial details are entered Daily. However, at the end of each week, Timesheet Logs have a Final Edit from the Fee Earner and Team Leader – Purely as a check on Detailed Task Reporting.
The time taken is minimal, and does not impede Productive Time. Neither does is require constant interruptions; and consequential recovery time! Staff also keep a Daily Diary Sheet, which further reinforces any supporting information offered for Project Manager Inquests.
When we do have instances where Clients or Project Managers request an Audit, the information can be produced instantly! This invariably halts the ‘Runaround’ of Pointless Activities associated with the ‘Game’ of getting paid on time!
As an aside; Many firms use Cost Multipliers used against Basic Salary to account for Cost, Overheads and Profit. Some even consider that Gross Employee Salary multiplied by Three covers it all!
You need to know your Costs as well as Salaries! – Multipliers do not work at the Fine-Tuning Level! Very often, Profit Margins have to be adjusted according to Client or the Nature of a Project. Similarly, sometimes there has to be a Resource Shift – Short-Term Contract Staff employed for a short period of time, but at a relatively high cost; or staff have to be deployed transitionally across two or more projects.
Some also argue that Spreadsheets are ‘Passé’ and that today’s Architect has to be joined (umbilically) to an ‘iPHONE App’ – Whatever that might be! However, whether Spreadsheet, Bespoke Software, Smartphone Technology or Pen and Paper the tenets of operation are exactly the same – Keep it Simple and do not let the means to an end become the end itself!
Bravo Bob! I applaud you and your firm for the diligence and creativity employed in your methods for capturing and recording time. This is not about technology, but rather about recognizing what’s important to continuing the success of a firm. Accurate and timely recording of time is one of those important aspects.
Thank you for your excellent contribution to this discussion.