Financial Management for the Small Architectural Firm 301: Putting It Into Practice

In my previous article, I provided you with some important terminology that you need to become comfortable with in order to run a successful architectural practice. I also provided a few examples of reports that you can learn to use to help you in developing a proper 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. It’s a great tool to help you understand your business since it's part of a platform that includes business intelligence, time and expenses, project management, billing, and reporting. This is how you will manage your basic accounting needs such as taking care of your accounts payable (i.e., the bills you owe), as well as running financial reports such as the Balance Sheet and Income Statement.

Payroll

Once your firm reaches a certain size (4 people or more), I recommend using a payroll company like ADP or Paychex.

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

One of the reasons why using software to manage your projects is essential is, when properly used, your projects and people will be organized and efficient. This will make sure you have more productive use of your direct hours (i.e., the hours you spend on projects as opposed to 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 asking for fees that are commensurate with the quality of service you are providing. If you can properly present sound reasons why the fees you are asking for are reasonable and fair, 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 biggest 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 own discretion if you opt to do it for free this one time, but let them know in the future you will have to charge them for any more 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 just 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 smart 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—the standard of care and your exposure to liability are exactly the same as if you were being paid. So free services can come with 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 realize 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 whom the client expected to pay for these changes? No good deed goes unpunished.

Reimbursable Expenses and Markup

Since I’ve visited well over 200 architectural firms over the years, I’ve been able to see 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 allowing you to be reimbursed for certain expenses (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 to expenses. While certain clients might balk or attempt to negotiate the markup, you are entitled to this since you do have overhead and administrative costs related to these expenses. By using proper tracking software (i.e. BQE CORE), you will be certain that all the expenses incurred will be charged if allowed by 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.

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.