The One Thing Missing When Profit Happens

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 up with a plan we could use in the future. I can’t claim to be an expert on the topic of ’profit’, but here are my thoughts.

These are some of the questions I considered after finding we had a profit:

• What should I use it for?
• What do we need?
• Should the profit remain in the firm?
• Should I share the profit with everyone? How much do you share?
• How do you allocate the profit?

Before we get into answers, let me explain what I mean by profit. The simplest way to define it is that profit is what you pay taxes on - actually it is what is left after you pay taxes. Arriving at this amount generally doesn't happen before Christmas, the traditional bonus-giving time. Dealing with that issue is another blog post some day. So profit is what you have left after you pay taxes.

What is profit used for? This is what we have done.

• Mainly we have used profit for bonuses for staff and principals.
• We have also funded strategic projects, say, technology, marketing initiatives, FFE purchases or replacements. This is how you would save up to buy or build your own building, or open a branch office.
• We had good intentions about building up a rainy day fund, but it never reached the size we had in mind.
• Working capital was always a goal, too, so that we could avoid using the bank's money.

That brings up one of the insidious things about borrowing.
Paying it back feels like an expense, but it is actually handing over your profit to the bank. What's worse is that those principal payments will increase the taxes that you owe.

So if you have decided on bonuses, a new plotter, and have made some loan payments, you probably just decided on how to allocate your profit. In fact my experience is that trying to allocate profit by some formula never seems to work out. Instead, if you give some thought to what you would do with a profit of $xxx, this always seems to 'allocate' the profit. It also gives you a target to shoot for if you turn the process around and decide what you would like to do with any profit, put numbers on each item, add it up, and you have your profit target - or at least your first stab at a target.

Our firm, which over the years averaged six people, usually aimed for a 20% profit. We found that 20% was a much better target than 10%, because it seems like the nature of the beast is to fall a bit short of the the target. We usually built 20% into the calculation of our hourly rates. 

Thinking about profit and what you would do with it seems to inevitably lead to thinking about how you would hit the target, what will it take. This kind of planning is always a good thing.

A lot of these profit strategies and tactics may not seem like they apply to one or two man firms, but I think it should. If you are going to take the responsibility of running the firm in addition to doing the work, I think you ought to get more than a standard salary for your efforts. Otherwise you are paying for the privilege of calling the shots, rather than being rewarded for it.

I wouldn't expect everyone to agree with my take on profit. After all most architects have to make this stuff up as you go along. I certainly did. Every year seemed to be another course toward earning an MBA.