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. To learn more about Steve, his firm Management Consulting Services or to dive deeper into the subject that Steve is sharing with us here at Entrepreneur Architect, visit his website at ManagementConsultingServices.com.
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…
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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