It’s Not Only the Fees (Rough Numbers)

Photographer: Michael Longmire, in Unsplash

When I talk to architecture studios about calculating fees, I often come across a problem: they don’t have the slightest control over their finances.

Most of them usually don’t know whether they are making a profit or losing money with each project, whether their balance is positive or negative over the year, or how much they need to charge to break even.

They often consider a project profitable if the fees they charge exceed their overheads (photocopies, permits, consultation…), as if time had no value at all.

But that’s not all.

This is a serious problem because it prevents studios from having an accurate overview of their finances and, therefore, from being able to improve. Cash balances gradually decrease and nobody knows why or what to do about it.

Rough numbers

Rough numbers allow you to estimate (I repeat, estimate) the amount (H) you need to invoice during the year to break even and not incur losses.

H can be obtained through a simple exercise in addition:

H = 0’3H + F + I

where:

• F is your fixed annual costs: the things you have to pay each month just to stay in business. These include things like wages (even if you’re a one-person operation you should assign yourself a wage), rent, marketing, and depreciation (the cost of computers, licences, furniture, etc., spread out over successive years).
• 0.3H is the mean overheads for your projects, expressed as a fraction of your fees (this does not necessarily have to be 0.3): the structural calculations, site managers…
• I is your financial expenses: the interest payable on your debts.

What the numbers tell you

By estimating the H value in this way, you can immediately see how well you are doing. For example, by the middle of the year you should already have generated 0.5H. If you haven’t, you need to wake up.

To arrive at that H value, you have to work out whether you need to do 8 x R-radius single-family dwellings or 2 X-size developments.

If you apply the analysis to individual projects, you will know whether you are making a profit or loss in each one, which ones are profitable and which ones are not worth the effort. You will also be able to establish a baseline for your fees, so that you won’t lose money when you tender for a job.

If you also take a truly professional approach to controlling your finances, you will have more information with which to make decisions about the advisability of incurring debts and about cashflow previsions, end-of-year profits, etc.

Professionalising your finances (precise numbers)

Rough numbers have nowhere near the potential of good financial management.

The examples I have given in this article are quick, easy-to-obtain estimates, but it would be much better to work with more precise figures.

It’s like when you are working out how to fit together a structure. You know more or less how it’s going to work, but then you have to do all the detailed calculations.

Actually, I would recommend professionalising control of your finances as soon as you can, by means of financial statements (balances, profit-and-loss accounts…) and analytical accounting tools (to know what is a happening in each project).

Admittedly, that is not always possible. But in the meantime, at least set up the basic mechanisms that will give you a minimal amount of control (rough numbers). And pay attention to your finances: it will make for better results.

Text translated by Andrew V.Taylor