The Business of Architecture – Practice Styles and Management

Part 3 Update Course The Business of Architecture – Practice Styles and Management The Mackintosh School University of Strathclyde University of Dundee

OVERVIEW • ARCHITECTS AND CLIENTS • All architectural practices and most clients are business organisations. • All business organisations follow specific rules. • Today we shall look at: • Types of business organisations • Capital • Accounting and Reports - modes of communication

TYPES OF BUSINESS ORGANISATION • SOLE TRADERS - Smith Architects • All but very small businesses must keep information about value added tax and other tax. • The government requires information on company profits to calculate tax. • Sole traders pay tax directly. • In a sole tradership, the financial well-being of business and owner are directly linked

TYPES OF BUSINESS ORGANISATION • PARTNERSHIPS • Governed by the Partnership Act of 1890. • The relationship that exists between persons carrying on business in common with a view to profit. • There will be a deed of partnership covering capital introduced by each partner, ratio of sharing of profit and loss, partners’ drawings and dissolution. • Partners are jointly and severally liable. • Goodwill can have a financial value.

TYPES OF BUSINESS ORGANISATION • LIMITED LIABILITY PARTNERSHIPS • Governed by a new Act of Parliament. • The relationship that exists between persons carrying on business in common with a view to profit. • As with an ordinary partnership, there will be a deed of partnership. • Partners are jointly and severally liable. However, the extent of the liability can be limited to the extent of the funds held by the partnership as a legal entity.

TYPES OF BUSINESS ORGANISATION • LIMITED COMPANIES • Limited companies have a separate legal identity. • A limited company is one which is registered with the government. • A company can sue and be sued. The limited liability gives protection to the directors against losing sums greater than agreed as the extent of liability. • Creditors are less protected when dealing with a limited liability company. • There are rules over the management of a company’s funds.

TYPES OF BUSINESS ORGANISATION • LIMITED COMPANIES • An office bearer in a limited company is known as a Director. The Managing Director may only be an employee of the company. • The head of a limited company is usually the chairperson. • The controlling element within a company is the share. • Companies can issue shares. It is possible to be a shareholder and not be a director. • Within a private company, shareholding is limited and restricted.

TYPES OF BUSINESS ORGANISATION • PUBLIC AND QUOTED COMPANIES • A public company can issue shares. • A quoted company can trade shares in a recognised stock exchange. • The performance of the company will determine the value of the share once it starts trading. • Before being able to trade in the stock exchange, a company must meet certain performance requirements. • Share issue is a way of raising money for a company. • A company has a responsibility towards its shareholders.

CAPITAL • RAISING MONEY • All business organisations need money to survive. • If an organisation extends credit and is not “cash rich”, it will need to raise finance to survive. • Sole traders can only take on loans or overdraft facilities. • Debt carries with it an obligation to pay interest. • Debt providers are called creditors. • Creditors often look for security on a loan or other form of debt. • Secured loans can be fixed or floating.

CAPITAL • RAISING MONEY • Companies can raise money by issuing shares. The financial value of shares is known as equity. • The owner of shares in a company will own a proportion of that company. • Ordinary shares will provide a dividend, which is based on the profitability of the company. • Shares can have voting rights attached.

ACCOUNTING REPORTS • MODES OF COMMUNICATION • Profit and Loss • Profit is equivalent to revenue less expenses. It shows what has been achieved over a period of time. • Balance Sheet • The balance sheet shows the company’s resources, showing what it can utilise in the future and also the commitments it has to meet. • Cash Flow • Profit is not the same as cash. The cash flow forecast will show how the money moves within the company and can be used to calculate maximum degree of indebtedness.

ACCOUNTING FOR ARCHITECTS • THE TYPE OF ORGANISATION IS IMPORTANT • An architect needs to know who he/she is dealing with. • An architect needs to know the financial structure of his/her own practice. • Business tools such as the Profit & Loss Account, the Balance Sheet and Cash Flow Forecast are essential to allow a business owner or director to know whether the management decisions taken have a beneficial or adverse effect on the organisation. • In business, if it is not going to make you any money, there is no point in doing it.

CAPITAL • MANAGING MONEY • In financial management there must be a clear delineation between cash (liquid assets) and profit. • We have looked at the difference between cash flow forecasts, the Profit & Loss Account and the Balance Sheet. • All of these are elements of a firm’s financial report. It is necessary for all firms to make financial reports to lenders and, in the case of companies, also to shareholders. • Although the 3 methods of financial reporting deal with different issues, the principles of balance between “money in” against “money out” apply. • To understand these systems, we must look at some of the terminology. Dunstrathtosh Short course 2011

CAPITAL • PROFIT & LOSS • Profitability is a factor of the relationship between REVENUE and COSTS. • The Profit & Loss Account is the statement of profits or losses in the year or other stated period. • Profit is the surplus of revenue over costs attributable for that period. It is not cash flow. • Profit can and often is earned despite strongly negative cash flow, particularly in fast growing companies. • A company which continues to make losses year on year will undermine the confidence of its investors. When confidence is lost completely, the company may go bust. Dunstrathtosh Short course 2011

PROFIT & LOSS • PROFITABILITY • In an architectural practice, increasing profitability is a management issue and relates directly to the functions of the practice and its method of operating. • If a practice is not profitable it may be that: • Office systems are inefficient • Too much time is spent on design • Effective monitoring of productivity against job costing is not carried out • Inherently unprofitable work is undertaken • Fees are too low • Costs are too high (such as wages, rent etc). Dunstrathtosh Short course 2011

ACCOUNTING REPORTS Profit and Loss Account Dunstrathtosh Short course 2011

THE BALANCE SHEET • FIXED ASSETS • Intangible assets - goodwill and amounts spent on developing products. • Tangible assets - buildings, equipment, furniture, computers. Shown after deduction for depreciation. • Investments - property - could be the office or other properties owned by the company. Dunstrathtosh Short course 2011

ACCOUNTING REPORTS Balance Sheet Dunstrathtosh Short course 2011

THE BALANCE SHEET • CURRENT ASSETS • Stocks - raw materials and finished goods. For an architect’s practice, this relates to work carried out by a practice which has not been billed, even if only part complete. • Debtors (or receivables) - amounts due to the company from other parties. This specifically relates to fee invoices which have been submitted to clients but have not yet been paid. • Cash - this is the amount of money that the firm holds within its bank account or in actual cash held in the office (this sum is usually very small). Dunstrathtosh Short course 2011

THE BALANCE SHEET • LIABILITIES • Creditors - people to whom the firm owes money, usually suppliers of services or equipment, but could also include outstanding sums to be paid in respect of income tax, rent or rates. • Overdraft - most people are familiar with the overdraft facility which is a variable loan specified usually on a short-term basis. • Long-term loans - loans which are to be paid back at an agreed rate over a specific term. • Shareholder’s funds - within a company, money paid by a shareholder for shares is held as a liability on the balance sheet. Dunstrathtosh Short course 2011

THE BALANCE SHEET • BALANCING ASSETS AGAINST LIABILITIES • The point of the Balance Sheet is that it should balance at any point in time for a firm or a company. • The significance for the financial management of a firm is that the long-term and short-term borrowings or liabilities have to be balanced against the assets in such a way as to ensure that there is always enough money available to pay the bills. • Effective methods of balancing the books when funds are tight are: • Taking out leases instead of purchasing items • Taking out term loans • Other methods of deferring expenditure Dunstrathtosh Short course 2011

LIQUIDITY • LIQUIDITY OR AVAILABLE FUNDS • Liquidity is “ready cash” or immediately realisable funds. In this context, to “realise” an asset is to turn it into cash, by agreement, sale or other disposal. • The most effective way of increasing liquidity is to obtain more money more quickly while paying out less money more slowly. • The financial manager must always be in the position to balance expenditure against money coming into the firm. • This process of management can be strategic, but also necessitates a tactical approach to resolving “cash flow dips”. Dunstrathtosh Short course 2011

LIQUIDITY • LIQUIDITY OR AVAILABLE FUNDS • There are a number of methods of changing a firm’s liquidity: • Speeding up the time from production to invoice. • Increasing the frequency of your invoices. • Improving credit control (reducing the amount of time it takes your debtors to pay). • Increasing the amount of short-term credit obtained (through cards, overdrafts or other finance arrangements). • Making arrangements with your creditors to defer payment. • Setting up term loan arrangements with institutions or individuals. • Issuing shares (if a company). Dunstrathtosh Short course 2011

CASH FLOW FORECASTING • FUTURE CASH MANAGEMENT • Cash flow forecasts are an essential tool in understanding exactly what money a firm will have to spend over a specified future period (usually either six months or one year). • Cash flow forecasts over longer periods become successively more unreliable, due to the fact that they are estimated upon sales which have yet to happen. • A cash flow forecast can be used as a management tool to ensure that liquidity can be managed. It allows measures to be taken in advance to deal with anticipated periods of reduced income. Dunstrathtosh Short course 2011

ACCOUNTING REPORTS Dunstrathtosh Short course 2011

VULNERABILITY • IMPROVING RESILIENCE IN AN ARCHITECTURAL PRACTICE • Do not “over-stretch” finances by seeking excessive levels of credit. • Ensure that a good relationship is retained with funders and creditors through effective financial reporting and business planning. • Ensure that your clients are happy and that they understand when they should pay you. • Limit the amount of work the practice undertakes for which it receives no remuneration. • Work effectively. • Try to spread the types of work carried out across a wide spectrum of job size and client type. • Watch the bank account and don’t be afraid to call in favours. Dunstrathtosh Short course 2011

PRESENTATION STYLE • Presentation Style is important in Professional Communications: • all communications in or outside the office must be professional. • Everything reflects upon the integrity of the practice. • Be aware of “office style”. All your output should match it. • Do not let work leave the office that you are not proud of. Dunstrathtosh Short course 2011

COMMUNICATIONS All Communications are Important • Your correspondence becomes the world’s view of the practice. • Reply immediately to correspondence and calls, if at all possible. • Do not reply immediately if your response is emotional. • Send a stalling reply. • Never use unguarded language or “spoken English” in a letter. contractor. • Always be polite. • Don’t ever be “funny”. Dunstrathtosh Short course 2011

THE PROJECT TIMETABLE & RESOURCES • To ensure that the fee is correct, work to your project timetable. • Present a timetable to your client. • Ensure that the correct resources are available and allocated. • Monitor your progress against the timetable to ensure that deadlines are met. • Update the timetable as necessary and inform the client. • Do not miss deadlines • Give yourself more time that you think you need to complete tasks. Dunstrathtosh Short course 2011

DEALING WITH OUTSIDE AGENCIES • There is a skill in working with authorities. • Lodge applications with a covering letter • follow up on the progress to keep it moving. • Diarise and keep in touch • Make friends with the officer dealing with your application. • Find out who the senior officer is • If the officer seeks additional information, drop everything and reply fully and immediately. • Meetings or phone calls often “soften up” an otherwise extreme requirement. Dunstrathtosh Short course 2011

SELF MANAGEMENT • You must manage your time well. It will be difficult to justify time-charge fees if you are not time-effective. • Do not leave the office if you do not have to. • Try to arrange as many meetings in the office as possible: make the other professional / client / contractor pay for the travelling time. • Keep a diary and do your timesheets regularly and as immediately as possible. • Write lists of things to do and separate “urgent” from “important. • Don’t be so absorbed in a task that you let other important stuff slip. • Don’t fail to read the mail because you are designing. • Don’t fall into the trap of doing first the things you like doing. Dunstrathtosh Short course 2011

PROFESSIONAL OPERATING PROCEDURES • For project administration, have a system: • All calls to the office are logged and messages taken so that you miss nothing when you are out of the office. • write everything in your diary/daybook. • attend office or team meetings at regular intervals to monitor progress. • seek advice from senior staff. don’t do things beyond your experience. • Use pro-forma procedures in the office for drawing issue records; recording disbursements; faxes and emails; specifications and schedules; contract documents, Certificates etc; drawings including, very importantly, revision to drawings. • The most important letter that you will ever need is usually the one that you can’t find. Dunstrathtosh Short course 2011

OFFICE STRUCTURE • Every office has a management structure: • Know where you fit into the structure. Who do you report to? What are your rights and responsibilities? • Ensure that you know what authority you have before you act. Are you allowed to sign Architect’s Instructions or other contract correspondence on behalf of the firm? • Find out the disciplinary and grievance procedures within the office. The company owner or partners will be liable for your actions. • Keep in contact with the highest possible level in the office. It will be good for your career. Dunstrathtosh Short course 2011

THE MANAGEMENT OF OTHERS • You are a manager. Your team will provide good quality work if you: • Communicate effectively with your staff and set them realistic and achievable goals. • Delegate effectively, don’t just delegate what you don’t like doing. • Remember the relative financial value of your time. • Don’t hang on to activities (like design for example). • Own the team. Don’t forget to praise good performance. • Keep criticism constructive and don’t ever let it get personal. • If you are not getting respect it is most likely because they think you don’t respect the team. • Always do what you say you are going to do. Dunstrathtosh Short course 2011

RISK MANAGEMENT • Overstretching personal or office resources is the main cause of claims against architects. To steer clear of claims: • Keep within your knowledge base. • Keep expanding knowledge through CPD. • Work to your systems • Seek help if you are out of your depth. • If you need more time, tell someone. • Be aware at all times of whether you are contributing to someone else’s delay. • Don’t ever tell lies even small ones. • Negotiate first. Dunstrathtosh Short course 2011

CLAIMS MANAGEMENT • Be aware of impending claims or disputes. • “If there is doubt, there is no doubt”. • Mediation is the growing field and adjudication predominates in the building industry. • Some courts such as commercial courts can be very effective in resolving disputes quickly. • It is better for the parties to negotiate rather than enter into a dispute. • It is better still not to get into a dispute in the first place. • Remember that parties will always enhance their opening position. • Don’t get too stressed about it. • Negotiation, mediation, adjudication, arbitration and litigation are the accepted dispute resolution methods. Dunstrathtosh Short course 2011

THE BASICS OF BUSINESS • FOR AN ARCHITECTURAL PRACTICE TO SUCCEED • It must be able to sell to obtain commissions. • It must promote and work effectively with a view to increasing profitability. • It must ensure that it charges the right amount, so that it does not lose too much work or carry out work unprofitably. • It must check out its clients in advance to make sure that they will pay. • It must keep its clients happy - happy clients pay on time. • It must invoice as soon as possible. • It must not extend undue credit. • IT MUST PROVIDE GOOD SERVICE AND NOT TAKE UNDUE RISKS. Dunstrathtosh Short course 2011

CONCLUSION • Any questions ? Gordon Gibb Director of Professional Studies The Mackintosh School of Architecture 177 Renfrew Street Glasgow G3 6RQ tel: 0141 353 4662 fax: 0141 353 4703 ADMINISTRATION ASSISTANTS TO PROFESSIONAL STUDIES: Lorraine Garner tel: 0141 353 4656 email: l.garner@gsa.ac.uk Dunstrathtosh Short course 2011

The Business of Architecture – Practice Styles and Management