Fundamentals - How an Architectural Firm Works
The Financial Model of an Architect’s Office is a well-kept secret. I have never seen it mentioned anywhere. But there are several things that need to be in balance to get positive financial results. The resources available from the AIA are only useful if you already have an MBA-like understanding of finances.
A Financial Model entails more than “Income minus Expenses should be a positive number.” Negative numbers equal poison. You can’t survive much poison.
I have to mention Page Highfill here. He is the architect who told me about the
financial model that architects need to know about.
Why MyCorbu Needs Custom Billing Rates And How I Plan To Do It
The Initial Four Architectural Fee Types In MyCorbu
Three things are needed to be profitable. Of course I am referring to the time after you have secured a commission to design a project and also a reasonable fee to do the work.
How often do you complete your timesheet?
I personally have used 'twice monthly', 'weekly', and 'daily' timesheets. You are probably different than me; but when I filled out my timesheet it usually went something like this ...
What You Need To Know
93% of architectural firms don't need accounting - bookkeeping is plenty.
Small firms don’t need accounting.
Your accountant doesn’t agree with me.
He’s wrong unless your firm has over 20 members.
The problem with accounting is that it requires brain-surgery-precision for a task that doesn’t much matter. When you stop to think about the time, effort, and aggravation that accounting requires; and what benefit you receive in return; something is fundamentally wrong. Basically you can’t afford to do accounting until you are large enough and complex enough to afford a bookkeeping employee.
I know this because my six-person firm used accounting for most of our existence and got almost no benefit from the tens of thousands of dollars per year that we spent on accounting. Why did we do it?
Ignorance. I thought I had to. I mistook AIA publications as applying to me. They don't. They apply to much larger firms than I ever had.
About 93% of architectural firms are smaller than 20 people. They can't afford accounting. They can only afford bookkeeping.
So what is the difference?
For over 20 years I had the benefit of having Project Financial Status calculated for me by our (pricey) accounting software after each month was ‘posted’. You could choose from two methods. Method A was automatic but gave useless results. Method B required you to input an overhead factor to allocate overhead per hour of time charged to the project. This method gave consistent results and the results were accurate as long as your overhead factor was up to date.
You can see how to calculate an overhead factor here.
MyCorbu provides the same Project Financial Status as a pricey accounting system. One difference is that MyCorbu does it daily rather than monthly.
Most Architects can’t afford to do accounting
The reason is simple. Most architectural firms have less that 10 people.
By most, I mean 80%.
And architects can’t afford it because it takes at least 20 hours per week of someone’s time - on average. Just for accounting functions.
Reimbursable Expenses are like boomerangs.
They are supposed to return to you like a boomerang.
Are your boomerangs returning larger, smaller, the same size, or not at all?
Determining your Billing Overhead Factor [BOF] can be an eye-opening exercise.
I learned this technique from Paige Highfill, an architect, who was teaching other architects how computers can be used in architecture even before CAD came along. When I tried out the calculation, I was shocked to find that we were losing $15 per hour on every hour we billed! I suggest that you avoid that situation.
A fellow architect, Mark R. LePage, has been following my journey with MyCorbu, the architectural bookkeeping app. Mark has a podcast on his website, EntreArchitect. Episode #164 features my interview with Mark that took place on March 22, 2017. Use this link to visit that episode or click the image above.
Profit planning wasn’t a concept I was familiar with. I distinctly remember our first profit and not knowing what to do with it. I didn't have a plan. I didn't even know I needed one. That’s probably one of the best problems to have. I don’t remember what I decided to do, but I know that was the start of many efforts to come to grips with profit planning in case the miracle happened again. I can’t claim to be an expert on the topic of ’Profit Planning’, but here are my thoughts.
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