According to the American Institute of Architects, up to 1000 architecture firms are launched annually. But unfortunately, only 25% of them are left running three years later. Well, running an architectural firm is not a mere sprint. What separates incredibly successful and struggling designers is more than luck. It calls for years of hard work, dedication, and meticulous financial planning and management to weather crises, grow and thrive sustainably. Here are the five components of a financial management system for architectural firms:
A Well Laid Down Chart of Accounts (COA)
A chart of accounts (COA) is a vital financial management tool that gives an index of any account in the company’s general ledger. It provides a clear and accurate insight into the firm’s account activities and financial transactions to various interested parties, including shareholders, and current and potential investments. Each COA must have a name, identification code, and a brief description for easy locations of the specific accounts.
Time tracking is a crucial financial management tool that helps to capture and track the time spent by the company’s team members. This should be done on a timely, correct, and daily spreadsheet. Time tracking entries make it possible for the firm’s accounting software to separate the time into two major categories:
- Direct Labor: Direct labor involves the time spent handling project activities that are billable to the customers and chargeable to a project. It also includes the ultimate time spent on activities that might be chargeable to the project but un-billable to the customers.
- Indirect Labor: This is the time spent on general and administrative activities. (non-project activities).
Dividing time tracking entries into the two major categories makes it possible to calculate and determine the firm’s overhead rate and net profit.
Revenue projection refers to the money your architecture firm anticipates to make in a specific period. For instance, the amount you expect to make when you invest in solar penny stocks. Usually, these projections are run for monthly, quarterly, or annual account periods based on your business. Revenue projection is crucial first because prospective investors might need to see it. The projection makes it possible to develop the firm’s staffing and operational plans.
Revenue is your firm’s lifeline, and you need to ensure you have all it takes to keep your firm growing to higher levels. To create a reliable revenue projection for your firm, you must do extensive research and have vast internal knowledge. This includes consulting your marketing team, reviewing previous sales, consulting clients about anticipated future needs, and evaluating business and design trends predictions. For an architectural firm, revenue projection encompasses the following:
This includes the submitted project proposals yet to be approved. Creating a revenue projection for such projects requires estimating when the work will commence. Remember to multiply the outstanding project revenue by a probability factor depending on when the work is likely to take place.
Backlog (ongoing projects to be completed)
A project backlog refers to the already approved work yet to be completed. You must shoot your firm’s backlog volume that equals or exceeds your firm’s annual net operating revenue. If the backlog decreases, you might be short of work and income the following year. But if it increases, you might have to re-evaluate your staffing plan and hire more staff.
Unidentified future projects
This entails the tasks that must be found to bridge the gap between your firm’s outstanding proposals and the backlog revenue. It refers to the work you need to do to find more projects and customers in the following years.
While accounting and financial management might seem like a huge task, it is a crucial part of the success of any architectural firm. You must therefore create a powerful, accurate, and reliable financial management system for your firm to avoid struggling with financial frustration.