Some architects see attention to financial management as incompatible with a commitment to design. But the idea that art and commerce can't coexist “is a dangerous myth that relegates legions of design professionals to a marginal professional status,” write Steve L. Wintner and Michael Tardif in their new book, Financial Management for Design Professionals: The Path to Profitability. The goal of the book, the authors say, is to “dispel this myth in the strongest possible terms.” Wintner, a Houston-based architect, ran his own firm and directed the operations of two others before starting a second career as a management consultant to design professionals. He and Tardif, an author with over 20 years' experience in the industry, are committed to helping other design professionals do more than just make ends meet. Stop selling yourself short. “If you have no reasonable prospect of earning a profit on a project, walk away,” says Wintner. “Redirect the energy you would have devoted to the money-loser toward a money-maker. In hindsight, you will ask yourself what you saw in the ‘must have' project in the first place.”
Don't count money that isn't yours. When it comes to accounting, the biggest mistake architects make is thinking of money that they've billed to clients but they're obligated to pay consultants as part of their operating revenue. Counting money that is destined for consultants will give you a skewed view of your firm's financial picture, the authors say.
Instead, focus on net operating revenue. Net operating revenue (NOR)—invoices sent to client less invoices received from consultants—should serve as your baseline. For a typical firm, payments to employees for hours charged to projects will consume about 30 percent of NOR. Other overhead will consume about 60 percent. That leaves 10 percent profit. Knowing these benchmarks helps you quickly gauge how well your firm is doing.
Don't overdo confidentiality. Too many firm principals believe that financial information must be withheld from employees. The only financial information that should be withheld, the authors say, is that pertaining to individual compensation. Otherwise, it's in your interest to share financial information in order to build the financial management competence of the entire firm. And don't worry that a disgruntled employee will take your financial information to another firm. Most other firms would refuse to even look. And what if the information did fall into “enemy hands”? The finances of a design firm aren't all that unique or mysterious. The primary value of the information is what it reveals to you about your firm's performance, says Wintner.
Know where your time is going. Time is the fuel on which a firm runs. Everyone must keep time sheets, including—and especially—those at the top. Accurate timekeeping allows you to develop other measures, such as your utilization rate, the ratio of time worked on specific projects to total hours worked. For most design firms, a utilization rate of 60 to 64 percent for the firm as a whole, and 75 to 85 percent for professional/ technical staff, is a realistic target. Lower rates could mean that too much time is being spent on nonproject activities.
Pay attention to external trends. Many firms get into trouble not because they are unaware of economic or market trends, but because they fail to act on the information they have. If you pay attention to economic trends, you may be able to shift your focus away from a market that's headed for trouble. Or you may realize that you have to eliminate positions. Laying off staff is always difficult, but if the signs are bad and you ignore them, the negative impact could ultimately affect a greater number of your people. And as a leader, say Wintner and Tardif, your first responsibility is to protect the viability of the firm.
Fred Bernstein studied architecture at Princeton and law at New York University and writes about both subjects.