This is a follow up 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 EntreArchitect™, visit his website at ManagementConsultingServices.com.
You Show Me Yours & I’ll Show You Mine
How to Improve Your Annual Profit as an Architect
I appreciate your response to my recent article here at EntreArchitect and the comments indicating an interest in learning more about how to improve your annual profit as an architect.
Generally speaking, upon completion of my formal education and becoming an architect, I was unaware of what was involved in the actual operational and administrative aspects of running an architectural firm. Therefore, this very important area of the business is, understandably, assigned to those with these specific skill sets and training.
Nevertheless, in order to run a successful and profitable operation, the firm leader (owner/managing partner/P-I-C, etc.) must bear the responsibility of fully understanding the processes/systems that the firm has in place, and be able to read and interpret the respective financial reports for them.
The most critically important reports are the Profit/Loss Statement for Accrual-Basis reporting, the Income Statement for Cash-Basis reporting, and the Balance Sheet. These three reports provide weekly, monthly and/or quarterly statements of the firm’s financial status.
Some firm leaders might not be aware of the importance of accrual-basis reporting and its review necessity. Understanding how to read and interpret these reports is too often not given a priority in the running of a firm, due to their seemingly boring and mundane complexity. However, demystifying these financial reports is not “brain surgery”. Given the time and interest they deserve, they can be mastered over a relatively short period of time.
6 Operation Processes/Systems Required for Earning a 20% Net Profit Annually
For each of the following six items I will provide an overview of each one and share how it will improve your annual profit as an architect. Each plays a critical role in the successful achievement of a 20% Net Profit annually. A more detailed discussion of all of these topics would be too expansive to include in this article.
1. Firm-Wide Accountability
Without a top-down implemented firm policy, requiring the full accountability of every member of the firm, it will be more difficult to create excellence in every aspect of the firm. The total commitment of the firm’s upper management is the most critical component; however, there must also be a clear understanding by all members of the firm about how this system is developed, and the respective responsibility of each for its implementation and adherence.
2. A Time Management Discipline
The least complicated, but critically important resource in a design firm’s financial reporting processes is the often ignored and much maligned Timesheet! When’s the last time you completed your timesheet?
Far too many firms regard this resource as something that can essentially be ignored until the last minute, or even the last hour, before it must be completed and submitted to the Accounting Department or to the person responsible for collecting and reviewing timesheets.
Believe it or not, this is often the one area that has a huge negative impact on a firm’s financial prosperity. After many years of evaluating both small and large firm issues, such as low productivity and little or no profits, plus the flawed notions of why these issues exist, my experienced opinion has concluded that it is often related to the lack of a disciplined time management policy or just laziness, or both.
For detailed information on Developing a Time Management Discipline, see my article posted on this blog back in January.
3. The 7 Key Financial Performance Indicators of the Profit/Loss Statement
With good accounting and financial management practices (e.g.: accurate and timely reporting of time spent and expenses incurred; accurate project fee budgeting, etc.) in-place throughout the firm and if the firm also has in-place an annual budget and profit plan, for planning and managing your firm’s finances, it’s a relatively simple process that consists of the following three tasks:
- Measuring the variances between the firm’s actual, year-to-date financial activity and its year-to-date annual budget on your monthly Accrual-Basis Profit/Loss Statement.
- Identifying a clear understanding why these variances have occurred.
- Taking prompt, appropriate, corrective action, as necessary.
4. A Consistent Project-Delivery Process
Once your firm has an appropriate computerized accounting/financial management system in-place, the next step is to develop an appropriate Project-Delivery System.
Developing a project management support system for this delivery process is essential. Then the qualified project managers need to be identified and a position description developed that outlines their roles and responsibilities for this position.
5. A Project Fee Budgeting Process
With the project management support system it will be necessary to develop an appropriate Project Fee Budgeting Process. This fee budget will provide each project with a work plan that includes the budgeted hours and dollars for the project fee, and a breakdown of these budgeted hours and dollars by phase and the primary tasks included in each phase, per the Contract-defined basic Scope of Services.
6. An Effective Delegation Process
The successful delivery and completion of the project will require an effective delegation process to be in-place, as a firm-wide policy and procedure. This process will require effective, clear communication between all levels of the project team hierarchy.
Numerous articles and books about each one of these six topics, including the many articles I have had published, including the book on Financial Management I co-authored and was published in 2007, and the many workshops I have conducted at the three component levels of the AIA, over the past 20 years. The previous topics are listed in order with the more important items down to the lesser important items.
I encourage you to take the necessary action and invest some of your time and the firm’s financial resources to enhance improvement of its Net Profit annually.
Question: Which one of the 6 operational components above could most benefit YOUR architecture firm if implemented today?
Photo Credit: Shutterstock / Oliver Le Moal