Financial Management, Part 3: Putting it into Practice
INTRODUCTION
In my previous article, I provided you with some important terminology that you need to become comfortable with to run a successful architectural practice. I also offered a few examples of reports you can learn to use to build a solid financial foundation for your firm. In this installment, I’m going to get into the practical aspects of financial management. The day-to-day things that really need to happen in your small firm.
ACCOUNTING
First, the obvious stuff. You need some accounting software. My recommendation is BQE CORE. It is both highly affordable and scalable. Also, when used properly, it’s an excellent tool for understanding business, and it doesn’t hurt that it integrates with QuickBooks Online for those of you who just can't let it go. Regardless of whether you use BQE CORE or QuickBooks, this is how you will manage your basic accounting needs, including handling accounts payable (i.e., the bills you owe) and running financial reports such as the Balance Sheet and Income Statement.
PAYROLL
You can also use QuickBooks to handle payroll. However, once your firm reaches a certain size (4 or more people), I recommend using a payroll company.
Note: Please do your own research to find the best payroll company for your firm. They can do a lot more for you than just payroll, but I’ll let them sell their own services. Frankly, I find the services worth every penny. It takes the burden away from you, the firm owner, so you can focus on what you do best. They are also responsible for making sure your payroll taxes and benefit contributions are paid on time, so you don’t ever get penalized for late payments.
PROJECT MANAGEMENT
In the spirit of full disclosure, I am the “father” of ArchiOffice and part of the team that created BQE CORE, so please keep that in mind when I also tell you that your firm should seriously consider using BQE CORE to manage your contacts, clients, projects, time/expense tracking, and invoicing. I won’t go into it here, but you are free to learn more on their website. BQE CORE will do all the things your firm needs for office and project management that QuickBooks can’t. And some of the things that QuickBooks does, BQE CORE does better.
One reason using software to manage your projects is essential is that, when used properly, it can help keep your projects and people organized and efficient. This will ensure you use your direct hours more productively (i.e., the hours you spend on projects rather than on overhead activities).
MARKETING PLAN
Aside from the software, let’s talk more about what things you should be doing to make sure your firm is profitable. Assuming you have already taken my advice from the previous blog post and created your firm’s own Operating Budget (Profit Plan), you should also spend some time working on a Marketing Plan. It is well understood that firms that use and follow their Marketing Plans are more successful than firms that don’t bother creating a plan or create one but stick it in a drawer and don’t follow it.
Your Marketing Plan should include at least the following sections:
Marketing Budget
Image and Brand
Target Markets
Key Differentiators
Relationship Marketing
Networking and Promotional Opportunities
Social Media
Public Relations
YOUR FEES
In my first article in this series, I discussed becoming savvy as a businessperson. One of the fundamental traits you need to develop is not to be shy about charging fees commensurate with the quality of service you provide. If you can properly present sound reasons why the fees you are asking are reasonable and fair, the fees will not be an obstacle to you winning the project. Even if you are interviewing for a small project, I recommend you rehearse this with your partner, a colleague, or even your spouse so you don’t go into an interview without having properly prepared. If you spend more time developing pricing and negotiating techniques, you will be able to be assertive and successful.
UNCOMPENSATED SERVICES
One of the most significant flaws I see architects make is providing their clients with uncompensated services. Your firm must use solid Architect – Owner contracts that clearly spell out what is (and what is not), included in your fee. When you see your client asking you to perform services that are not in the contract, you should first bring this to their attention. It is at your discretion whether to do this once for free, but let them know that in the future, you will have to charge them for any additional services. Throwing the client a “freebie” is always a good marketing tactic, but only if you first inform them that you are doing them this one favor. If you give away your services without the client’s acknowledgment, you will find them expecting free services in the future. You’ve set the precedent. This is another reason why you have to become a savvy businessperson. They will respect you for standing up for your rights. Not all clients want to take advantage of you. Most are well-meaning but need you to have the backbone to stand up for your rights.
One thing to keep in mind when providing free services is that the standard of care and your exposure to liability are precisely the same as if you were being paid. So free services can come at a very high cost. Here’s an example of where I once got burned. My client decided to add a fireplace to a family room addition we were designing for them. Of course, by the time they decided to go ahead with the fireplace, we had already completed the Construction Documents. It was a simple change to pop in a prefab fireplace, so my project architect went ahead and made the changes and got the revised sketches out within an hour. No charge. Weeks later, we realized that the exterior flue violated the building setback lines, and it had to be removed and installed within the building. This cost money, and guess who the client expected to pay for these changes? No good deed goes unpunished.
REIMBURSABLE EXPENSES AND MARKUP
Since I’ve worked closely with more than 1,300 architectural firms over the last 3 decades, I’ve seen a lot of what goes on in the back office. One of the biggest areas where firms leave money on the table is in their ability to capture and charge for their reimbursable expenses. Please make sure your contracts include a clause that allows you to be reimbursed for certain costs (travel, printing, etc.). And just as important is to include a clause that provides a markup. My firm has always included a standard 20% markup on expenses. While specific clients might balk or attempt to negotiate the markup, you are entitled to it, as you do have overhead and administrative costs associated with these expenses. By using proper tracking software (e.g., ArchiOffice), you will ensure that all costs incurred are charged, if permitted by the contract.
I could go on and on, but I think I’ve hit the limit for a single blog posting. Perhaps I’ll be back with another posting on ideas to help your firm strengthen its financial foundation. Now, go make some money, and – great architecture.
