Imagine setting out on a trek without any idea about how far the campsite is, the number of miles you can tread per hour, which route will save you some time and what to do in case you’re lost. To some, this is a perfect ‘adventure’ but even the most adventurous people would advise against it.
Starting out your business with no planning is quite similar. Expertise in your domain can only get you so far in business. Think of your architecture practice as a creative ‘business’ and not a ‘creative’ business. Long term success for a business is impossible without a business plan. There are infinite resources on how to write a business plan for your venture, but I find the guidelines on the Small Business Administration website to be the most useful.
Among other key aspects of a business plan such as market analysis, value proposition, customer identification, robust financial planning plays a vital role. It ensures that your business runs smoothly, that your firm has a structured growth and that you
have a cushion to fall back on in case of emergencies. Here are a few essential tips on how to make an effective financial plan for your architecture practice.
Consider the example of a trek. Before you start, you make sure you’re physically and mentally prepared, you check the weather forecast, set timelines, carry a map, a compass, a camera etc. Maybe you ask your friend to lend you his/ her tripod for a few days. Similarly, before drawing a financial plan you must list down the resources you have in hand such as client leads, initial investment, technology, office space, collaborators, etc.
In case you are missing a few key ingredients, figure out the best way forward. For example, if you are running short on funds to hire an employee, raise an advance invoice to your clients. If you’re able to communicate how hiring an employee is going to speed up your work which in turn will help their project timelines, they wouldn’t mind paying in advance.
1. Plan in phases
Financial planning is a phased process. It is better to break down your plan in 3-4 month long phases. It helps you set more realistic goals. If you think a co-working space works much better for you than your home-office, but the current funds in hand don’t allow you to rent out an office space, you may want to include it in the next phase of your planning. But if you need licenced software from Day 1, list it down as a prerequisite.
2. Categorize projected expenses
The four most commonly used categories to group and manage projected expenses are - one-time, recurring, fixed and variable. List all the expenses you are bound to incur in the short and long run in this table. For instance, buying a printer is a one-time expense. However, refilling cartridges is a recurring expense. Your employee salaries, housekeeping, supplies etc. are fixed expenses that hardly change over a course of a few months or a year. But consultant fees, travel expenses etc. may vary based on individual projects and so, they are a variable expense.
Add them up to determine the minimum amount of money you must earn. Such categorization helps you identify exactly where you may be able to cut down your operating costs and where you may have some leeway to spend more. Say your social media marketing budget needs a boost. If you postpone buying that top notch laser printer of your dreams to the next quarter, you could use the money saved for getting more leads this month.
3. Goal setting
Goal setting is a precursor to making an action plan. Your financial plan begins to take a distinct shape if your goals are clearly defined. Even if some of your goals are too ambitious for the timelines you’ve set, goal setting makes sure your plan is pointing towards the right direction. Limit your goal setting to qualitative aspects. Think of them as what success would look like, at the end of your quarterly or annual cycle. For instance, moving from your home-office into a commercial space by the end of the year would be a success, and hence an achievable goal for your financial plan. Doubling the number of employees might be another well defined goal.
Once in the right direction, you must set milestones in order to achieve each of your specific goals. Milestones or Key Results answer the ‘How do we plan to achieve the goals’ question. Milestones are quantitative, as they are a measure of how close you are to the goal. For instance, if your goal is to give a Christmas bonus to your employees in December, you can plan your finances in a way that a specific percentage of your monthly profits go towards a bonus fund so you wouldn’t be stressing about it in November.
5. Fee structure
Defining a fee structure for service providers is not as simple as it is for a product seller. Instead of adding up production costs, packaging, transportation and profits, service providers have to answer more qualitative questions such as how much value is your service adding to the project or what sets you apart from the rest. Other than your time and work experience, it is these aspects that your client will be paying for.
Your fees should cover all the costs involved in running your practice such as salaries, sub-consultant fees, software and hardware investments, taxation, supplies, printing, utilities, travel, etc. In order to make profit, your projects must earn you more than the break-even point that you have set for yourself. Base your financial plan on your fee structure and the number of projects you are capable of taking up each quarter. If you know how to get hired without compromising your fees, your financial plan is bound to succeed.
6. Profit vs. Cash flow
Maintaining a steady cash flow is as important to your business as making a decent profit. Large scale projects may earn you more profit, but only over a longer period of time (say a year or more). Small scale projects, most of which are short duration (say 2-3 months), may not earn you the same amount of income, however, the frequency of the income is higher. This cash ‘flow’ is essential to cover your weekly and monthly expenses such as utility bills, salaries, supplies, etc. If most of your short term costs are covered, the income from high-paying work or large scale projects can be dedicated towards specific goals such as growth, outreach etc.
7. Taxes, legal compliances and emergency fund
Based on the structure of your business and where you are located, specific taxation and legal norms will apply. Hire an accountant (preferably someone who has an experience with architecture/ consultancy firms) for filing and maintaining your records. You may also use accounting software such as QuickBooks, Freshbooks or Xero for maintaining records yourself. Taxation and legal compliances, if unaccounted for, might jeopardize the success of your financial plan.
Dedicate a certain part of your income as an emergency fund which is sufficient to cover the basic costs like rent and salaries for a few months in case of an emergency such as a pandemic or an economic slowdown.
8. Maintaining records
Even if it seems insignificant, every small financial decision which is in the benefit of your practice must be put on record, along with your profit and loss statements, cash flow statements etc. In the long run, financial records determine the growth pattern of your business. This pattern will be of interest to your future investors and lenders. Make use of online assistance available on websites such as Small Business Administration in order to manage your business better.