We love looking after our architect clients, and are experienced in doing so whatever the size of the practice or where it is in the growth cycle. We understand the challenges that they can face, so we carefully devise plans to ensure that we address these hurdles with our clients, and overcome them without detracting from the main aims of the business.
Architects are typically owner managed businesses so it is always enjoyable building and maintaining trusted advisor status with the decision makers who benefit directly from the successes achieved. As with all businesses, having regular open and challenging communication about all aspects of the company ensures that we are forward looking as well as reporting on past performance.
There are four common financial issues that architects face in their business:
- Work Flow and Resource Management
With bespoke distinct projects, although an architects practice can have recurring clients, the timeframe between projects can never be guaranteed.
There is always a balance to be struck between working on existing projects and pursuing new opportunities, be it through competition or recommendation/direct approaches. Current projects can be all consuming, and therefore it can be hard to look ahead at your pipeline. In addition, the pipeline of new work may look strong but if it’s timing is uncertain the practice could end up with large peaks and troughs in its work flow. Project management software packages are of course available and are a vital tool for established firms, but they are expensive for a practice in the early stages of growth.
The main impact of this on the owner is having to decide just how big a workforce the practice needs at any one time. Typically, a practice may be able to plug short term needs by the use of subcontractors/temporary staff but typically these are a more expensive solution than employing somebody. However, once a member of staff is employed there is less flexibility to reduce staff numbers because of the rightful protections to employees under Employment law.
In conclusion, the balance between employing staff and using subcontractors can be difficult to navigate, with the optimal team size often being hard to pin down. We help the owners by ensuring they look up from the current tasks that may be dictating their focus and to look ahead at their projects – which ones are certain, which are likely and which are hopeful. Then to look at the timing of these projects to see if it’s possible to smooth peaks and troughs. Based on those project timings we then can discuss the numbers and level of staff required to fulfil those projects.
- Cash flow management
Architect’s projects are typically front-end loaded with fees, so the firm will usually have cash in the bank. Our discussions are therefore rarely about where to obtain funds such as loans, overdrafts etc but more on how to utilise the surplus cash and plan for the future.
The challenge comes in making sure the positive bank balance is managed so there is ample cash when the project is in the build phase. In this phase, the architect is likely to be incurring costs but have little fee income from the project. This is when cash flow forecasting is required, and this is something that we are experts at.
Our discussions about an optimal level of withheld cash dovetails with the work flow and resource management challenges. We help clients consider what buffer of cash is required should the practice face a trough in work flow which couldn’t be avoided or was totally unexpected. We use the cash flow forecast to look at and discuss the sensitivity to projects being delayed (e.g. planning permission delays) or the impact of slow payment from customers and how those impacts can be mitigated.
- Work in progress calculations
At a month end the amount billed for a project is unlikely to match how far through the project it is. Indeed, RIBA Stages are designed so that the fees issued will be in advance of the amount of the total project completed in the earlier stages. This is why architects need to know the costs incurred on each project as they progress. To do this, many will invest in time/project management software.
Although vital to medium and larger firms, we would always look at the cost/benefit questions before advising a new practice to invest in such software. It might be that decent information can be collated via timesheets and some Excel reports, both things that we, as accountants, are very familiar with! Either way, an estimate of expected costs to complete the project is needed. This is clearly a judgemental area and we discuss with clients their views here and look at trends in the profitability of historic projects versus current projects whilst always bearing in mind that each project is bespoke so its profitability may vary markedly from others.
Once both the costs to date and the expected costs to complete have been calculated this gives us the % completion at that date. We can then calculate the amount of the total project fee the practice has “earned” and compare that with the actual amount billed. Typically, we would expect fees to have been billed in advance so we would adjust the results to reduce the income in the profit and loss account. Assuming that the project is profitable overall this would have the impact of pushing out some of the profit to later on in the project.
The overall objective is to ensure that the client’s results accurately match revenues with costs based on the best information available at the time, but the area is very judgemental and we are using our skills to best reflect the architect’s expertise in how the project will progress.
- Exit Strategy
When it comes to an exit strategy, architects can find it hard to sell the business and leave it. The prime asset is usually the skill and reputation of the named partners or the owners.
This means that deals which work in other sectors where, say, the founders act as consultants/non-executive directors for a year or so after the deal are much less common in the Architect sector. We would look from an early stage of our involvement with our architect clients to discuss along with growth/expansion plans, what the ultimate end game is for the founders.
Where the client has grown and employees a number of staff, the founders are usually uneasy about bringing the business to close where they reach a point in their life where they don’t want to continue in the profession. Where this is the case we will discuss with the founders who they might have identified from their team that they think might be capable and even more importantly have the desire and hunger to want to take over the reins. Once identified such transitions need to be handled smoothly so there is up impact on customers. As a result, these changes may take a number of years to shape and action, so lots of careful planning is required.
As part of this planning, we may change the ownership structure by perhaps inserting a holding company to own the practice. This holding company may be used to hold surplus cash which can be drawn on by the founders as they move to exit the company. It could also be used to own the studio the practice operates from and maybe the founders might leave the practice but still draw a rental income stream from it.
A more recent development in the sector has been the number of practices that have moved to an employee ownership model through the use of employee-owned trusts.
Conclusions
All of these challenges can be overcome with regular communication, planning and financial modelling so that an Architectural practice can thrive. We have highlighted just four common pitfalls based on our extensive experience with this sector. There are numerous other business and accounting issues that we would like to discuss with you, as well as tax planning ideas that are applicable to the sector. To discuss these points in more detail, or specific matters that impact your practice, please contact us.