Financial Management for the Small Architectural Firm 101

Providing great architectural services and running a financially successful firm are not mutually exclusive. It’s quite the contrary. If you are as good an architect as you think, you’ll be successful and it won’t be because of your design skills.

I hate to state the obvious, but for most architects, design is the fun and easy part. It’s in our DNA. And while the world is filled with lots of bad designers, it’s also full of lots of really great designers. What separates the great-struggling designers from the great-successful designers isn’t luck.

It’s not your fault that after all the years of education and training you endured to become an architect when you don’t know the first thing about how to run a business. Sure, you can design – like nobody’s business – but do you truly understand the difference between income and revenue? How about a credit and debit? Do you know what an overhead factor is and why it’s so critical? Do you know what your minimum billing rate is? Did you ever sit down and map out your firm’s operating budget?

Chances are the answer to all these questions is no. So let’s get to work and get you on the right track to understanding your firm’s finances.

But wait. You’re an architect. You provide design services, the end result of which is hopefully a timeless piece of architecture. Why do you need to understand the business side of architecture? It’s hard enough to be able to create architecture, why burden yourself with all this business stuff that just seems to get in the way of design?

I’m always amazed how architects spend more time perfecting the designs of their projects and learning things such as sustainable design practices but don’t put much effort into making their own firms sustainable.  Let me put this as succinctly as possible. No Profit equals no Business. Unless you have a big fat trust fund or married rich and you can be a gentleman (or lady), architect, my advice is before building someone else’s house...

Get your own house in order.

As I began writing this, I was just about to plunge into a litany of terms and definitions and then I recalled whom I’m talking to. You’re an architect. You’ve managed to make one of the biggest and most difficult steps in your career by opening your own firm. Nothing could be more important than being able to make your mark and to exceed your client’s expectations. You want to provide the finest design services possible to ensure your status as an architect and a designer. In addition, you want to create a firm that people want to do business with.

That’s all very noble and commendable. I was the same way. In fact, I recall a conversation with my partner only a few months after he and I opened our own firm, Burns + Beyerl Architects, 20 years ago in Chicago. I already had 7 years of experience at one of the largest firms in the world and my partner had been working at a renowned Chicago firm for 9 years. I told him that my single focus was to produce the highest quality architecture possible. It was all about the design.

My partner’s response? He went into business with me to make money. I was stunned. I mean really stunned. I had never heard an architect say he was in business to make money. In fact, it made no sense to me. If you wanted to make money, why the heck would you go into architecture?

Granted, I was still young(ish) and naive. The idealistic student who lived for the design studio was still very much a part of my identity. But 20 years later I can look back on that moment as one that was as pivotal in my development as was my first Erector Set or the box of Lincoln Logs I received when I was 5 years old.

It may be a sad, sobering fact, but making money is what allows us to do the things we want. It gives us power. And if all you want is to be a good designer then make sure you bring people into your office who want to make money. Then, and only then, will you be able to flout your talents, pick your projects and reap the glory that allows you to sit back and say you are successful.

Being a strong businessperson also earns you the respect of your clients. Being able to stand toe-to-toe with someone who has the means to afford an architect – to speak in a language that they understand business wise –demonstrates that you’re not a push over. You understand the rules of the game and you wield them to the benefit of your firm, your projects and your clients. Clients are attracted to winners.

Sorry to be the one to rain on your parade. But now that you’ve opened your own office you’re going to have to grow up quickly. No more playing in the backyard sandbox. Now you have to provide for your new family, that is your firm.

Yes, your firm is now your Work family. You have a responsibility to make sure the money is flowing in for this family just as you have responsibilities with your Home family.

Your income is no longer just about paying the mortgage or rent, to buy food and clothing. To pay for the car, the gas and maybe even have a few bucks left over to splurge on something special every once-in-a-while.

When you hire people to work in your firm, you have a responsibility to them too. After all, they too are using your business as a way to bring income home. Your cash flow has to cover both your Work and Home families. And as the owner of the firm, you’re the last to get paid.

In order to explain the essentials of firm financial management, I have broken this information up into a series of small, digestible articles. Some of this information may be obvious to you. Some of it may seem overly detailed while other parts not quite detailed enough.

In the end, understanding financial management is like understanding building codes or doing a zoning and code analysis. Even though you think you understand everything, it’s essential that you stop and go through the process. I wouldn’t undertake a project without preparing a zoning and code analysis. Even if I worked on a similar project across the street, I would start all over each time.

Take nothing for granted. Things change, conditions vary slightly and there’s always the possibility that you might miss something important if you just take it for granted.

In the next article, I’ll begin by reviewing basic terminology and looking at a few examples to show you how to set and reach your profit goals.

About the Author: Steven Burns, FAIA spent 14 years managing the firm Burns + Beyerl Architects, and during that time the firm’s earnings grew at an average rate of 24% per year. After founding his own software company, Steve took his management expertise to BQE Software, where he is refining their business strategy and product development for the company’s groundbreaking project accounting solution, BQE CORE.