5 Financial “Pro” Tips for Architects

ADVICE WHEN STARTING A FIRM

INTRODUCTION

I was recently asked to provide some financial advice to a young architect who had just launched her new firm. I thought about this for a minute and recognized that while I could talk for hours on the subject, she wasn’t looking for a lecture. Just as important, there will be things that this young entrepreneur will have to experience herself to appreciate the lesson.

What I came up with are 5 simple things that will dramatically impact her firm. The internet is littered with financial tips for small businesses. However, I wanted her to be aware of aspects particularly relevant to the practice of architecture. I believe these suggestions, specific to our profession, elevate them from mere “tips” to valuable “pro tips”.  Not only are these things you should do, but if you don’t do them, you are putting your firm at unnecessary risk. 

So, let’s go! Here’s the countdown. 

#5: THINK OF EXPENSES AS INVESTMENTS

Every dollar you spend should be considered an investment with an expected return (ROI). Your firm is not a consumer on a shopping spree. It’s not a vacation. It’s your livelihood, and most likely will be responsible for the livelihood of many individuals. 

Let’s take the simple exercise of deciding whether you are going to purchase a large-format printer. Don’t do this as if you were buying a printer for your personal use at home. While I expect that you will do the research necessary to determine the best printer for your purposes, please understand that while you might have to spend $10,000 on this behemoth, it has revenue potential. Now, do your homework to determine what revenue will be earned from this investment. What is the expected rate of return on that $10,000 outlay? Based on your planned use, operating expenses, and eventual reimbursable expenses, when will you recoup your initial investment? Can you earn it back in 6 months? Maybe 3 years? If that’s not satisfactory, what else could you spend $10,000 on that would make you more money in less time?

Expenses include absolutely everything you spend money on. Let’s look at one of the big items: your office space. Think about how your firm has managed to operate over the last two years. Have you figured out a way to keep everyone busy and efficient while working remotely? If so, now think about whether the a priori decision we all had about having an office still has merit? If your firm was spending $10,000/month on rent ($120,000/year), could you take that money and hire another employee instead (who probably will yield your firm a 20% profit).

Maybe you like the idea of having an office, a place to meet with clients, and show off your work. If so, can you do that with half as much space? Can you quantify the return on investment for the $120,000/year spent on space that your clients occupy very rarely? 

Apply this approach to every expense. If you spend $100,000/year on an employee, do you know what their profit margin is? Have you done the exercise to see what spending $150,000 on two employees with less experience brings you as far as an ROI? These types of questions are easily answered when you use the right software to manage your firm. 

#4: CLEARLY SPELL OUT ADDITIONAL SERVICES IN YOUR PROPOSALS

I’ve never met a firm that didn’t experience abuse from its clients. If you’re lucky, this abuse only manifests as free services. While that might seem innocuous, it’s extremely damaging as it has knock-on effects that reverberate throughout your firm. It impacts efficiency, utilization, schedules, and even liability. There’s an entire hour we can spend discussing this topic. But for purposes of this article, let’s say that giving away your services for free isn’t just desultory, it’s contagious, sends the wrong message to your clients and staff, and has potentially disastrous effects.

Most firms have proposals that discuss what is included in their services. This is a great start. But you should also explain what isn’t included. If this isn’t clearly spelled out, your client is probably thinking that it’s included. If there is no mention of it either way, how are they to know?

Now that you have set the stage, make sure everyone on the team understands what’s included in your basic services and what constitutes an additional service. As soon as an event happens that should be an additional service, this should trigger a process that allows you to reach out to your client and let them know that you are happy to do what was requested, but it falls outside the scope of work. From that moment on, you should track all effort expended on this new service. Smart time and expense-tracking software designed for architecture firms makes this process painless and enables you to monitor time, costs, revenue, and profit associated with this effort. This should be done regardless of whether the additional service will be based on a fixed fee or charged hourly. Provide your client with the cost to do this and get it formally approved (documented). I suggest that if you charge hourly for this work, it should be at a 20% premium over your basic service rates. You should be able to defend this upcharge since it increases your liability and disrupts your other project schedules. Oh, and if you don’t believe additional services can have an impact on your liability, suffice it to say that most mistakes happen during change orders. And change orders are the most common additional service.

#3: TAKE FINANCIAL BUDGETING SERIOUSLY

Understandably, architects and accountants are like oil and water. After all, how much time did you spend studying accounting or business compared to the time you spent in the studio? 

We are in a profession that understands the power of elegant systems: where countless disparate pieces come together to create a beautiful, coherent composition. We recognize the benefits of efficiency. Therefore, developing a stronger relationship between your firm's accounting system and the actual management of your firm, your staff, your clients, and their projects should be clearly valuable.

I can’t stress enough the benefit of creating a financial budget for your firm. We all know that the best-run projects all have budgets that allow the team to understand what is expected, how much time they have, how much revenue will be earned, and track their performance as they execute the work. But too few firms apply the same rigor to running their office. Please don’t treat your firm with any less care than you treat your clients. Creating a financial budget for your firm means you will have control over your overall success.

To achieve the required level of analytics and control, your firm will need an accounting software program. While there are many to choose from, I recommend selecting a system that understands the unique needs of the architecture industry. There are some popular generic accounting software programs in use by all small and mid-sized businesses, but I don’t recommend these. I’ll offer you this simple analogy. When looking for software to help you design architecture (CAD/BIM), you really want a system that understands your needs. You don’t select design software used by graphic or web designers. We all know that the tools built into our CAD/BIM software are tailored to our unique needs. The same holds true for how an AE firm operates. You aren’t running like a dog-grooming business or optometry shop. Why use the same accounting system? If you think accounting is just accounting – well, you don’t know accounting!

Back to the topic of financial budgets. Once you have the right software, you can finally see the individual revenue and expense categories for your firm, how they relate, and where profits and losses occur. The software will help you set short- and long-term goals to drive growth. It will allow you to monitor cash flow, revenue, and expenses on a monthly, quarterly, and annual basis. You’ll be able to trim costs and avoid overspending. You’ll be able to balance your work to accommodate slowdowns. You’ll be able to achieve your strategic planning objectives once you have established a budget for all expenses and revenues. And lastly, you’ll finally have a robust and informative database of your financial records.

#2: INVEST IN BUSINESS AUTOMATION

Surely, this one should be obvious. I would expect anyone reading this article to have automated systems in their home: lighting and sound systems, recording TV shows, alarm clocks, and turning exterior lights on and off at certain times of day. The list is endless. Some more sophisticated architects will have automated processes within the firm to help produce drawings and even specific design processes.

The benefits of automation should be obvious. So, why not apply this to your business processes as well? There are brilliant software solutions built specifically for architecture firms that automate many repetitive, mundane processes, such as time tracking, invoicing, analysis, and reporting. Systems offer the added benefit of bringing business intelligence and, in certain situations, artificial intelligence to the firm, relieving architects of uninspiring responsibilities.

When properly implemented, business automation systems for architects can deliver a truly remarkable return on investment. The side effect of automation is that people in your firm who were previously burdened with business tasks find themselves with more free time to engage in functions that can really help grow the business (i.e., marketing) or increase their utilization by giving them more time to work on revenue-generating projects. 

Another benefit of business automation is it eliminates the need to maintain spreadsheets. If I had a dollar for every spreadsheet I’ve seen in use at architectural firms, I’d be golfing with Elon and Jeff. Using spreadsheets to run your firm is about as efficient as drafting by hand. Think about that for a moment and you’ll understand that you’re trying to drive a Ferrari with a coal-fired engine.

#1: ADOPT A “BUSINESS-THINKING” MINDSET

I saved the best for last. This is a lesson that is especially hard for many architects because our education is focused on design (or technology in the service of the built environment), and not on the business of architecture. But I want you to get over this educational deficiency quickly. I’ll suggest there are two ways to achieve this.

One method is to admit to yourself that you have no interest in running a business. Perhaps you created your firm because of your love of architecture and the belief that hanging out your shingle would give you total control over the design and the client interaction. If this is the case, hire a business manager —or, better yet, take on a business partner whose sole focus is the business. This will allow you to devote your full attention to serving your clients.

My preferred method, however, is for you, the brilliant architect and designer, to apply your skills to your business. You’ll be amazed at how challenging and rewarding this will be. Educate yourself by reading business books and taking online classes to hone your business skills. Once you do this, you’ll see the beauty of creating a living document—a business plan — and an aspirational document—a strategic plan. You’ll recognize their similarity to the parti-diagram for your designs. A clear parti diagram means your project has a greater chance of being a successful piece of architecture. It sets out the guiding principles, provides clarity, and serves as the roadmap for the team to execute the work. The strategic plan does the same for your firm.

Adopting a business-thinking mindset means you are always looking at opportunities in our ever-changing marketplace and finding where your skills fit. What can you do that can provide value to your existing and future clients that aren’t already in your bag of tricks? Look around and see all these amazing opportunities for your firm, with the same passion that you may be looking for new products to utilize in your designs. New building products will serve your client well, and finding new business opportunities will serve you, your staff, and your firm’s future. 

Any business that has no one looking after it, is a business that is running on luck. And as the casino operators know, luck is bound to run out.