With a return to operations in the construction industry, now is a key time for architects to consider the core financial elements of their business to plan and adapt to the sector post-Covid-19. Keeping a close eye on the numbers will help you recover from the financial impacts of the pandemic and build an even stronger business.
At Complete, we’re lucky enough to work with a range of businesses in the construction industry, helping them steer their business through the pandemic and plan for a better future. Here we address some key areas you can visit to minimise any financial impact of returning to work, whilst helping your practice thrive in your new environment.
Forecasting and budgeting
An article shared on RIBA’s website in 2017 suggested that only 60% of architecture businesses were actively preparing annual budgets and forecasts. These processes are a key element in understanding your business's financial resources, especially in uncertain times. With regular cash flow planning and a good forecast, you can get a holistic view of the health of your business, estimate the impact of future plans, and grow in line with your goals and ambitions. This will also enable you to stress test your business, see where your breakeven cash flow will sit, and at what point you may need to reduce overall expenditure to ensure you are not incurring a cash deficit.
There are several tools that can directly plugin to your accounting system to allow you to prepare budgets and forecasts based on your historic data. You can read more about them here.
Whilst these pieces of software are very powerful when used correctly, a first step may even be to prepare a basic outline on a spreadsheet and work from there.
Calculating your Revenue per Person
One key to the sustainability and growth of a service-based business is its revenue per person. This is the total revenue or sales a company makes divided by the full-time people working there. If your revenue per person is too low, this may lead to all of the team being paid other than the business owner. Too high and, well, that’s not so much of an issue, so long as you’re providing the excellent customer experience that you set out to.
As a metric, your revenue per person is simple to calculate:
Total Turnover / Total Team Members = Revenue Per Person
Once you have worked on your business forecast and planned what all of your planned expenditure is, you will be able to work backwards and calculate a minimum Revenue per Person to hit a ‘breakeven’ point. And in this sense, we’re including the owner/partners’ salaries, drawings or dividends within the definition breakeven.
Let’s look at a quick example:
Total Salaries: £192,500
Owner's Drawings: £40,000
Total Costs: £277,500
Team Members: 7
Required Revenue Per Person: £39,643
Increasing your Bid Success Rate
If you are able to convert a large proportion of the quotes or tenders that you issue, this can have a dramatic impact on the potential of your business.
The 2019 RIBA survey suggests that practices ranging from sole traders to those with 10 employees convert, on average, just 56% of all bids.
If this can be improved, even by a marginal percentage, this can lead to additional revenue for the practice and, so long as you’re well resourced to cope with the extra work, more profit for the owners. The additional revenue with no additional costs will trickle down into more profit, and a higher revenue per person. Winner!
But how can you achieve this?
First start by considering the overall experience you offer your clients, both current and potential. Work through the entire process from lead generation, proposal, follow up, client sign up, completion of work, and follow up, mapping out each stage carefully.
Taking the time to really design and improve the customer journey will help you provide a memorable experience for every client, making them more likely to refer future prospects to you and also return in the future. Whilst it’s often overlooked, the experience offered to those that you work with can add huge amounts of value for your clients, and is vital in helping your business thrive.
Monitoring progress with management accounts
Having a budget and a forecast is great, but you need to keep an eye on the actual results vs. the forecast to ensure you are making good progress towards your goals.
The 2019 RIBA survey suggests that whilst average revenue in practices has increased by 13%, profits have flatlined. In other words, the additional top line income hasn’t been converted into profits. If this is the case in your practice, that means there is no additional income for you as the business owner, which can stifle your growth.
Regularly monitoring your progress using management accounts can prove to be a key tool in allowing you to visit what has happened in the past, and allow you to pivot your business plan and forecast for the future months. Without a proper set of management accounts, you’re just second guessing how well your business is doing, which leads to assumptions and poorly informed decisions. Not ideal for growing a successful and long lasting business!
Think of management accounts as a vital health check for your business. Giving you a deeper insight into the financials of your business, management accounts can help you assess how things are currently performing. And in times as volatile as these, that’s an indispensable tool for helping your business to grow. The wealth of information in your management accounts also equips you with valuable insights to make the best decisions for your business going forward.
Having the right financial systems in place is key for providing the management insights needed. This means having good accounting software in place such as Xero, which helps you keep a handle on the numbers. You can find out more about using Xero to grow your accounting practice here.
With the right tools and strategies in place, you can grow an amazing architecture firm that is strong enough to weather any storm.
Ready to take your architecture firm to the next level?
We can help you get a handle on the finances with regular forecasting, budgeting and management accounts prep, providing you with valuable insights to build a more profitable business. We can also introduce you to the best tools for your practice, and show you how to use them to build an unbelievable business.
Sounds good, right? Send us a message to see how we can help.