The Art of Profit Planning: Setting Realistic Financial Goals For A/E Firms

I’ve always found it peculiar that architects and engineers, two professions that are keenly aware of the benefits of properly prepared plans, rarely apply the same standards to the management of their firms. Plan a project - absolutely. Plan the trajectory of your firm - not so much. This is where profit planning is incredibly helpful. 

Very few architecture and engineering graduates get exposed to business practices. When they are released into the wild, they find themselves working under a licensed professional, singularly focused on the execution of projects.  

Most professional service firms are small, with owners never formally trained to operate a business. They, like so many before them, learned on the job. Most firms are created and operated with minimal thought and planning. 

You all possess deep knowledge of process implementation and the advantages of careful project planning: skills that your clients greatly value. I urge you to harness these talents for your own firm as well.  

The Art of Profit Planning

Instead of solely focusing your planning, design, and execution capabilities outward, apply them to your own business operations. The impacts of careful planning are well-known in our profession. They are no less impactful for your business. 

Once you do this, you'll quickly notice the benefits that your skills and time, when inwardly focused, can have on your own enterprise. It's vital to remember without a successful business, you lack the necessary platform to practice your profession.  

Therefore, your initial responsibility should be to ensure your business is as thoughtfully planned, designed, and maintained as the projects you undertake. This inward application of your expertise will provide a solid foundation for your professional practice. 

Your Firm is a Project

When you design a project, you start by defining goals. These goals are generally aligned with the needs of your client. In addition, smart firms have goals for what value that project brings to the firm. Once you define these goals, you begin to apply the processes you have developed to execute and deliver the project - on budget and schedule.  

Let’s reorient your thinking and consider your firm as a project unto itself. It is, in fact, the most important project you will ever work on. In fact, everyone in your office is also working on it: they touch it every day. In business parlance, we refer to this as non-billable or unutilized time.  

When your staff is unbillable, what are they doing; why are they doing it; and how much time are they spending? 

Most firm owners don’t think about this. They think about the utilized time of each employee. Not their unutilized time. Firms get all excited when they hear an employee is 88% utilized but don’t ask what is happening with the 12%.  

Why am I talking about this when this article is supposed to be about profit planning?  

Well, half of that employee’s unbillable time is spent sitting around the office (the other half is on paid time off). Maybe they are working on marketing or administrative tasks (internal meetings, etc). Maybe they are doing something related to professional development. How much of that can be invested in something that will eventually increase profits? Most firms think about optimizing projects.  

This makes sense considering 85% of all time is directed there. But don’t ignore the business side of your firm since it is totally in your control and has the potential to grow revenue far greater than you realize. 

If you set goals for your firm and develop a budget (just like you do with your projects), you are on the path to creating a profit plan. I will assume that you expect to earn a profit for every project you work on. The budget you assign to the project should enable you to do the requisite work and when all is said and done, earn a profit. That’s a “Project” Profit Plan.  

The same holds true for the firm. Create a budget and make sure your revenue will allow you to execute everything within that budget and still return a profit. The creation of this (profit) plan is an important part of running a successful firm as it is the tool that helps you track your progress, identify areas where you can improve and make infrared decisions regarding your future.  

Learn how to create a strong initial project assessment and identify red flags before they lead to project failure.  

Benefits of Profit Planning

Profit planning involves analyzing past financial performance, evaluating current business trends, and identifying potential revenue streams to develop specific, measurable, achievable, relevant, and time-bound (SMART) financial goals.  

There’s no doubt you’re already well aware that A/E firms like yours operate in a highly competitive industry. Your firm must balance creativity with finances, manage costs and cash flow, and navigate economic and market conditions to achieve long-term financial success and growth. While there are many benefits that your firm will receive from proper profit planning, let’s look at the most salient: 

• Increased profitability: By setting clear financial goals and developing a plan to achieve them, you can increase your chances of profitability 

• Improved decision-making: Profit planning can help you to make better decisions about your business, such as how to allocate resources, what projects to take on, and how to price your services. 

• Increased peace of mind: Profit planning can give you peace of mind knowing that you have a plan in place to achieve your financial goals. This can help you to sleep better at night and focus on running your business.  

Set Realistic Financial Goals

While high revenue and profit margins may be the ultimate goal, unrealistic goals can lead to disappointment, financial instability, and missed opportunities. By setting realistic financial goals that balance revenue growth with other financial priorities, your firm can manage risks, maintain long-term stability, and motivate employees and stakeholders to achieve success. There is no sense in setting a goal if the probability of you actually achieving it is low. 

Imagine you are not in the best physical condition. You work too hard, you don’t get any exercise, and let’s not talk about all the bad snack foods you’ve been munching on throughout the day.   

Now, suppose you were watching the Boston Marathon on TV and thought: “Hey, I’d like to run in our city’s marathon next month.” Great idea. However, the probability that you will be able to get into the physical shape required to complete the marathon is thinner than the world-class runner who ends up standing on the podium.  

On the other hand, if your goal is to spend 12 months getting in shape and training to run a marathon, you are on the right side of reality. In a month - all the effort spent will have been wasted. Be realistic or you’ll just waste time and money. 

How to Create a Profit Plan

Hopefully, your firm is doing an annual review of last year's goals and setting the goals for the upcoming year.

Make sure that two things happen: 

1. You have the ability to earn the revenue needed to fuel these goals 
2. You have staff time allocated to help achieve these goals 

It is critical that you track your progress regularly. I recommend no less than monthly. Doing this, you will be able to identify areas where you are on track easily. Give yourself a pat on the back but don’t stop there.  

More importantly, identify areas where you are not achieving the goals. These are the areas where adjustments need to happen. This is also why it’s critical that you be flexible. Things change in business, so be prepared to adjust your plan as needed. 

The profit plan involves setting financial goals and then outlining the strategies your firm will implement in order to achieve them. Here are 5 things you should always consider when preparing your firm’s profit plan. 

1. Revenue Targets   
2. Profit Margin   
3. Overhead Costs   
4. Historical Financial Performance  
5. Economic and Market Conditions   

Don’t worry about the plans for other firms, think about your own business objectives, your own culture, and your long-term strategic plan. Remember, your firm is really a project. Execute it as though your client will fire you if you fall short.

Eight Ingredients to a Successful Profit Plan

1. Revenue Goals: Determine specific revenue targets for the year. This might be based on historical performance, market conditions, growth goals, etc. For example, the firm might set a goal to increase revenue by 10% over the previous year. 
2. Expense Management: Identify areas where expenses can be reduced without negatively impacting the quality of work. This might include finding more cost-effective suppliers, reducing unnecessary overhead costs, or improving operational efficiency. 
3. Fee Strategy: Review the firm's fee strategy to ensure it's competitive in the market while still allowing for a good profit margin. This might involve increasing fees for certain services or introducing premium-priced offerings. 
4. Service Expansion: Identify opportunities for offering new services to increase revenue. For example, the firm might decide to start offering interior design or construction management services. 
5. Client Acquisition and Retention: Develop strategies for attracting new clients and retaining existing ones. This could involve investing in marketing and advertising, improving client service, or focusing on specific target markets. 
6. Utilization Rate Improvement: Plan to improve the employees' utilization rate (the percentage of billable hours out of total working hours). This might involve training staff to work more efficiently, reducing time spent on non-billable tasks, or improving project management practices. 
7. Professional Development: Invest in professional development for staff to improve the quality of work and efficiency, which can ultimately contribute to profitability. 
8. Financial Metrics Monitoring: Regularly monitor key financial metrics, like net profit margin, gross profit margin, and overhead rate, to ensure the firm is on track to meet its profit goals. In order to achieve this, invest in technology, like BQE CORE that can make this process easy, fun, and real-time accurate. 

The Secret Ingredient: Communication

A lot of architecture and engineering firms shy away from discussing finances. There's often a sense of guilt about potentially underpaying staff, and a fear that sharing profitability data might lead to employees becoming either overly ambitious or anxious if profits are low. It's time to move past these fears. 

I've always advocated for openness in all aspects of a company's operations. The advantages of widely disseminating information, promoting learning, and fostering inclusivity in all business discussions are significant and the drawbacks are minimal. Make your profit plan clear and ensure everyone in the firm understands it. Yes, everyone! 

Having all team members informed about these goals and their progress in real-time means everyone shares responsibility. This collective involvement results in a stronger, more successful company and increases the likelihood of meeting profit goals. If a plan falls short, there's no scapegoating because everyone is accountable. 

Regular meetings with staff to discuss the firm's plans and necessary adjustments are crucial. Let's make the commitment to open dialogue and shared responsibility to build a stronger and more profitable future. These meetings help reinforce the notion that you are all a team, in business together and everyone has a part to play in making it a championship team. 

Tools to Monitor and Measure Performance

You will need to have certain tools in your arsenal to turn profit planning into an art. Having smart software to consolidate the information and provide business intelligence is essential. Whatever software you are using, make sure it simplifies the process and provides powerful visuals that make your job easier. 

Flexibility

The best-laid plans often go awry. That’s why it’s important to stay flexible and adjust financial goals as necessary. By remaining open to changes in market conditions, emerging opportunities or challenges, and other factors that may impact financial performance, your firm can adjust financial goals and strategies to stay on track and achieve success.  

By following these tips and utilizing the tools and steps outlined in this article, you'll be well on your way to setting and achieving realistic financial goals. Good luck, and happy profit planning! 

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