For architects, Capital Management is mandatory for helping sustain a business and thrive in the long run. It is an essential component for your business to grow and increase its foothold in a hyper-competitive market.
As per the American Institute of Architects, the prime reason behind the failure of architectural firms is the lack of skills to manage capital efficiently. Thousands of architectural firms open up each year, but a large percentage of those fail to stay in business.
We will discuss some crucial points for capital management and how to prevent your firm from bleeding dry. Let's start by getting a better understanding of capital management.
What is a Capital Management Strategy?
Capital management is all about having a plan in position for a business to manage its resources accurately. It aims to control the cash flows so that companies have sufficient funds to run the day-to-day operations, ensuring they don’t go out of business.
The main objective of a capital management plan is that the business maintains a balance between its assets and liabilities. An effective strategy will help businesses deal with any issues and avoid setbacks. Let’s move on to find out how you can create a capital management strategy ideal for your business.
Capital Management Strategy to Save Your Company from Losing Money
Like other small companies or sole entrepreneurs, architects can also find themselves stuck in a liquidity crisis. This occurs when you don't have enough money to run your business, and a solid capital management plan can help you avoid this situation completely.
The following are some things you need to incorporate in your capital management strategy.
1. Create a Business Plan
Before you start your career as an independent architect or a firm, you need to have a proper plan in mind. It will give you a direction to achieve your goals without any issues. There is no rocket science in creating a business plan for your architect's business. You can write down all of your goals and objectives in a single sheet with a specific timeline to achieve them. Here are some key components you need to include in your business plan:
- Mission & Vision
- Human Resource Planning
- Revenue Forecasts
- Profit Forecasts
- Overhead Expense Budgets
Besides these few things, you can also make other additions depending on your business or personal objectives, requirements, etc.
2. Project Your Expenses and Income
Having a business plan can give you a rough forecast about your expenses, but it is time to go in-depth and explore all the ways your business spend money. Projecting your expenses beforehand can help you eliminate additional overheads and surprise costs.
List down all the overheads your firm will incur, no matter how big or small it is. Next, highlight all the fixed expenses such as rent, wages, and salaries. Then, you need to cross out the unnecessary expenses.
In addition, you should forecast your income as thoroughly as possible to manage your expenditures accordingly. Not having enough money is the main reason why many businesses fail. That is why it is best to explore all areas to increase your revenue.
3. Make a Plan for Your Profits
In line with the concept of accounting, you should never estimate or record a profit before it happens. While you can't estimate the profits you will make, there is no harm in making a plan regarding what you will do with your profits.
You must channel your profits obtained correctly to ensure you yield maximum return. Make sure you divide your profit smartly so you can spend it on your needs and wants while retaining enough funds for a rainy day.
Financial Performance Indicators that Architects Need to Be Aware of
Although financial management and ratios do not fall into the every day work of architects, there are a few indicators they need to know. It will help them determine if their small business is going in the right direction.
One of the most important ratios for any business in any industry is the break-even ratio. It is the amount that the business needs to sustain a point where it is neither gaining any profits nor experiencing a loss.
This rate determines the profitability of the architecture firms in completing the projects. You can calculate it by dividing your profit before taxation with the revenue of your company.
The net multiplier is a proportion of overall direct labor that reflects the actual money earned by the design or architectural business.
The enterprise is profitable if the net multiplier is higher than the break-even rate. In the case that the net multiplier is lower than the break-even rate, it means the company is losing money.
One of the most important ratios for an architectural company is the utilization ratio. Since architects bill labor hours, they need to know about the utilization ratio to calculate the efficiency of their labor.
The ratio gives you the percentage rate of the hours spent on the project compared to the total hours worked. For any company, the ideal percentage of utilization rate should be around 70% to 80%. If yours falls outside of that range, you should consider adjustments.
Net Revenue per Employee
This is the percentage of the revenue that you are getting from each employee. It is calculated by dividing the annual net operating income by the total number of employees.
Capital management is the best way for your architectural firm to manage its resources, helping take your business to the next level. Additionally, you will have a robust strategy in front of you to achieve your goals in a set period of time.
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