Part 3 Update Course

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Nov 20, 2013 (3 years and 11 months ago)

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The Business of Architecture



Practice Styles and Management

The Mackintosh School

University of Strathclyde

University of Dundee

Part 3 Update Course

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



OVERVIEW

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.


TYPES OF BUSINESS ORGANISATION

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.


CAPITAL

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 REPORTS

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.

ACCOUNTING FOR ARCHITECTS

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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.


CAPITAL

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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.


CAPITAL

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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).

PROFIT & LOSS

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Profit and Loss Account

ACCOUNTING REPORTS

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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.


THE BALANCE SHEET

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Balance Sheet

ACCOUNTING REPORTS

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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).


THE BALANCE SHEET

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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.


THE BALANCE SHEET

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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


THE BALANCE SHEET

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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”.



LIQUIDITY

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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).

LIQUIDITY

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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.

CASH FLOW FORECASTING

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ACCOUNTING REPORTS

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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.

VULNERABILITY

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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.



PRESENTATION STYLE

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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”
.


COMMUNICATIONS

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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.

THE PROJECT TIMETABLE & RESOURCES

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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.


DEALING WITH OUTSIDE AGENCIES

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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.

SELF MANAGEMENT

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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.

PROFESSIONAL OPERATING PROCEDURES

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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.

OFFICE STRUCTURE

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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.

THE MANAGEMENT OF OTHERS

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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.


RISK MANAGEMENT

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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.

CLAIMS MANAGEMENT

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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.

THE BASICS OF BUSINESS

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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




CONCLUSION