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 bookshelves, 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 celebrated 20 years this past July). Separate responsibilities. Separate offices.
(This past week on the podcast, I spoke with another pair of architects about how succeed as a married couple in architecture. Check it out here.)
From that original 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.
Years later, things didn’t get better. Our office manager and two of our project managers chose to move on.
We survived, but survival comes with a price.
The line of credit was exhausted, the credit card was maxed out and our original investment spent on the office upgrades was still pending reimbursement years later.
Bottom line… we held some major debt.
How To Build a Successful Architecture Firm With No Debt
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.
4 Myths About Small Business Debt
Dave Ramsey, in his best selling book EntreLeadership, shares 4 myths about debt;
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 the recent 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.
The Count Down to Debt Zero
So, how can we build a successful architecture firm with no debt? Here are 4 step to make it happen.
4. Destroy your credit cards.
I cut up my business credit card years 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, that we should “live today like no one else, so tomorrow… we can live like no one else.”
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.
Question: 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 in the comments below.
Photo Credit: Shutterstock / tlegend
Mark,
Great article! I wish I would have read it in 2010. Fast forward to today. I followed the initial steps you took and it was quite the road out. I’m out now, with battle scars that have changed my mindset.
Keep writing. I’m really enjoying your insight!
Also, if you could write me back directly when you have the opportunity. I noticed that there is no “notify me on reply back”. I was rereading an article that you wrote and realized you responded to a previous comment I wrote. I never knew the first time. Can you add that feature? I think it would help engage the audience.
Take care,
Matt Gray
Sp8ce.Design
Mark,
Your journey sounds almost like a parallel universe to mine and likely there are many who experienced the pain of the recession. We too were overly optimistic about how quick things might turn around and bought the lie the debt is there to help you. It is not. It will kill you. At our low point, I was introduced to ‘Dave Ramsey’s Total Money Makeover’ book which I read in two days (I was desperate). I learned what I need to do. My wife and I then ordered ‘Financial Peace University’, a 13 week dvd class. We went through the whole class in two weeks. It radically changed our lives and the way we think about and handle money. I brought the class to my Pastor and suggested he start a class to help others. He told us to do it. My wife and I just finished leading our 5th class. It took us 5 years to pay off all that debt and we are now debt free and credit card free. It has become the most rewarding thing we do….to show others the way out of debt and build wealth…one little step at a time. The Financial Peace University Class is offered in group settings throughout the country. You can find a class near you at http://www.daveramsey.com
Mark, thanks for all you do and share. -Rick
Also using Dave’s classes/ideas for home and arch business. Coordinated the FPU classes twice in church too. Having only one (mortgage) payment to the bank is very liberating! Anyone can run a debt free company, just make a plan and stick to it.
I’ll let you know when I finish my presentation on “Your Architectural Office in a Backpack” subtitle: “why your next CAD workstation will be a laptop and what you need to know to choose the best one”.
‘Zero Debt,’ is a Business Model that has been foisted upon many since the 2008 Financial Crash. For some it became ‘Immediate!’ – For others ‘Time’ acted as a cushion, albeit in relative terms. In certain parts of the world ‘Easy Credit’ was available. Work was also plentiful, mitigating both Risk and the Cost of Running the Business. However, everything was adhering to a ‘Rising Curve’ – And, then it all came to a rather ‘Abrupt Halt!’
We must also examine ‘What has happened to the Profession?’ – Today, we now find that the Small Practice is ‘In the Ascendant!’ – Nearly 90% of Architects in the US and UK work within organisations of less than 10 Staff!
Today, Credit is harder to obtain. Even where it is, the terms can be quite onerous! – It can also be ‘Removed’ in an instant! Therefore, ‘Living without Plastic’ can take some getting used to!
However, in some territories, ‘Zero Debt’ is the ONLY option! Here, I will draw upon a Basic Principle of Practice – “If it can be Measured, it can be Managed!” – Albeit, the Measurement is ‘Zero!’ Now take the instance where what you have in the Bank (And the Biscuit Tin) will have to work ‘Overtime!’
‘Setting-Up Stall’ in a Foreign Country will put you in precisely that situation! – You are a ‘Johnny Foreigner!’ Capitalisation for the Business, its Running Costs, Rent, Salaries and Credit Theft (On the part of some Clients), will literally be coming from YOURPocket! – Yet it can be done!
All that is required is a level of ‘Good Stewardship’ together with different ways of thinking! – Think back to the times when Contractors have ‘Baulked’ at Variations! – Running under ‘Zero Debt’ will give you an insight as to WHY they were so reticent! Immediately, you will be thinking with a ‘Contractor’s Hat!’ – Instantly, things will have become ‘More Commercial!’
One could ask “Why didn’t we think like this Prior to 2008?” – The simple answer is that EVERYONE was living on Credit, which did not really exist! – Those providing it, were only ‘One Step Ahead of the Game!’ – And then everything came ‘Crashing Down!’
Now take the situation where a Cheque from a Client, for a Fee Payment is ‘Returned’ by the Bank! – However, you have issued Cheques for Salaries and Rent, dependent upon it! In the Middle East, you will ‘Go to Jail!’ – There is no ‘Community Chest’ and you will certainly NOT ‘Collect £200!’
Just to confirm, “You will ‘Go to Jail’ when your Cheques start Bouncing!” – Questions come afterwards! – Sufficient to ‘Concentrate the Mind?’ – Therefore, you ‘Exercise Caution!’ Your ‘Due Diligence’ is more comprehensive, and your Terms & Conditions should be ‘Stacked in YOUR Favour!’ – Especially where Clients have a ‘Damned Good Deal’ but still insist upon ‘Stealing Credit!’
There will also be a ‘Downside’ where Capital Purchases will have to be delayed! – You can only ‘Pay,’ when there is ‘Money in the Bank!’ Driving a Range Rover would be nice, but it costs far more to run than a Toyota Corolla! – Money you might need for Salaries and Rent!
‘Different Thinking’ can also create ‘Further ‘Opportunities!’ – For Instance buying ‘Nearly New’ Vehicles from a Bank Auction House will still give you an (almost) new car, with a Service History, and Remaining Warranty! – But with a 40% Discount on the Showroom Model! – Then plan to run it for Five Years rather than Three! – Or run it until it drops!
The same can be said for the Office! You will soon begin to ask “Why do we need to be located in the Architects’ Ghetto in the Middle of Town? – Does it attract Clients?” Now take a ‘Deep Breath!’ – Begin to assess your Current Strategies and Business Plan – Then apply a ‘What-If Factor!’ – “What would happen IF our Best Client went Bust tomorrow?” – There must always be a ‘Plan B!’
Your ‘Plan B’ should accommodate ‘Bread and Butter Projects! – Jam comes Tomorrow!’ Working with Developers and/or Contractors takes some getting used to! On the one hand we would all love to have our projects to be ‘Critically Acclaimed’ – Yet on the other, ‘We have to Eat!’
Finally, ‘Reflect upon the Past!’ Household Names, and Contemporaries! – “Where are they Now?”