Module 05A Practice Management Notes PDF

05A. PRACTICE MANAGEMENT Introduction This module covers a range of topics from the establishment of a practice through to its successful operation. Presenter Mark Boffa, Principal (NSW ARB 5506) Boffa Robertson Group Mark became involved in the profession from the age of 17 working as an...

05A. PRACTICE MANAGEMENT Introduction This module covers a range of topics from the establishment of a practice through to its successful operation. Presenter Mark Boffa, Principal (NSW ARB 5506) Boffa Robertson Group Mark became involved in the profession from the age of 17 working as an office assistant with Brown, Brewer and Gregory. He graduated with honours from UTS in 1989, registered in 1990, and in 1995 was appointed a director of the firm. Mark is now the sole principal of this aged care boutique practice of 12 people. Mark served as a member of the Australian Institute of Architects NSW Practice Committee from 1995 to 2007 and has been an examiner with the NSW Architects Registration Board for the past 12 years. Prior to that he was a presented in the PALS course and instigated the early edition of the practice management topic. Learning outcomes On completion of this module you should be able to: – Determine the key aspects of starting a practice – Formulate a sensible management plan for your practice – Understand how you could make your practice more successful – Demonstrate a better awareness of practice structure and associated risks NSCA 2015 Performance Criteria This module relates to the following competencies from the National Standard of Competency for Architects 2015: Practice Management 9.7 Knowledge of legal and regulatory requirements and obligations in regard to architectural practice, practice management and registration as an architect NSCA 2021 Performance Criteria This module relates to the following competencies from the National Standard of Competency for Architects 2021: Practice Management and Professional Conduct PC 1 Comply with the regulatory requirements and obligations pertaining to practice as an architect, including legislation, professional codes of conduct, obligations for continuing professional development and professional indemnity insurance. 1 References Starting a practice https://acumen.architecture.com.au/practice/business-structure--planning/business- planning/starting-a-practice/ Business cycles https://acumen.architecture.com.au/practice/business-structure--planning/business- planning/business-cycles/ Profit and profitability https://acumen.architecture.com.au/practice/fees/profit-and-profitability/ Office administration and manual structure https://acumen.architecture.com.au/practice/office-administration Time management https://acumen.architecture.com.au/practice/human-resources/managing-people/time- management/ Charge-out rate https://acumen.architecture.com.au/project/project-bid/fee-calculation/charge-out-rate/ Architects Award https://www.fwc.gov.au/documents/documents/modern_awards/award/ma000079/default.htm Fair Work Commission https://www.fwc.gov.au Student Employment https://acumen.architecture.com.au/practice/human-resources/recruitment/student- employment/ Employment of staff under contract https://acumen.architecture.com.au/practice/human-resources/recruitment/employment- agreements/employment-of-staff-under-contract/ Background Today we will be discussing practice management. Most of what you will hear today comes from personal experience both in setting up and running a practice and also as an examiner. Strategies that I have developed are a response to my experience and have worked for me and continue to work for me. They are not necessarily a solution for everybody. This presentation covers a range of topics from the establishment of a practice through to its successful operation. How many of you consider yourselves to be design focussed architects? And how many are business focussed? 2 Business is not a natural focus for an architect but is likely to be expected of you especially if you plan to promote yourself to commercial clients. Your role as problem solving architects requires you to have a certain commercial understanding which you will be expected to bring to bear on your work. So, at the end of this presentation I hope that you will have a better understanding of the key aspects of starting and managing a practice, and better still, to take away some ideas on how to make your practice more successful. A considerable proportion of complaints received by the board of architects relate to the architect’s poor practice management, so this aspect is important in keeping ourselves out of trouble. A brief history would be helpful to put what I will be presenting into context. – I registered on graduation after completing my course part time – Made my way up through the ranks of the firm – Eventually set up a new practice in partnership in 1998 – Had several offers to purchase over the years – Still here The new practice In establishing the practice, we needed to make some early decisions including: – Do we engage lawyers to advise us – we wanted to avoid this so we wrote our own partnership agreement (it mostly worked) – That we set up the practice in the easiest possible way – this turned out to be initially a partnership between two companies – Do we take out ‘keyman’ insurance – we decided not to – We formulated our own business plan – We converted to an independent company structure after 5 years Why start a practice? But why start a practice in the first place? Most of us who start our own practice believe that we can do better running our own show. This would cover aspects such as design control, possibly higher income, we will be happier, and the most unrealistic in my view – that we will have more spare time to do what we want to do. On the face of it, it sounds idyllic. 3 Requirements There are some key requisites to running your own practice: – You need to be registered (which is why most of you are here) – The practice needs to have a nominated architect – You need to have PI insurance Besides this, you should also have: – Balance of insurances in place – Office procedure manuals – Some money or access to it so you can bank roll the operation – Plenty of courage with support from those around you – An understanding of tax and other compliance requirements – And of course, clients. So, a marketing strategy would be handy Our own business plan was simple and dealt with the basics without getting bogged down. I have mentored a number of young architects who were establishing their own practice, and it is very easy to make this aspect more cumbersome than it needs to be. So, the basics should be covered first, with detailed elaboration on for example ‘what makes you different to the average architect’, to come later. The reality of running a practice however is anything but idyllic. It requires a steady approach over an extended period of time with many occasions of turbulence along the way. Running a practice Let’s explore the concept of running and owning your practice a bit more. The employee Most of us start as employees. Here is a snapshot from a freely available database that provides salary guidance for different professions. Here you can see a range of income levels for a senior architect. Some of you in this position might be earning more or less; some as you can see might also be getting a bonus or even a profit share. This is the world of the employee. 4 Business ownership Now let’s look at business ownership. Here is an example taken from the Commsec website of one stock listed on the Australian stock exchange – in the case the commonwealth bank. This snapshot gives us an overview of the performance of each share held in the company by a shareholder – including share price, current dividend, level of tax paid on the dividend and what the projected earnings might be in the next few years. Unlike the income earned by the employee example previously, the income derived from being a shareholder in this company (in other words a part owner), does not depend on us working in the company. What we are getting is a share of the profits, which is a different source of income. We may also benefit from some capital gain or conversely suffer a capital loss. Businesses in Australia are mainly small businesses as seen here from this extract produced by the NAB in one of their business magazines a few years ago. I thought it was a useful page to share with you because from it we can glean some interesting observations. For example, it is interesting to note that most actively traded businesses had turnover of less than 200k. Note that this is turnover not profit. A good proportion of these turned over less than 50k. 88% of businesses had fewer than 5 employees. So, thinking back to that senior architect who is employed in a practice and earning say 91k per annum, the question would need to be asked – why would that person start a business that might not generate the income required to provide a better standard of living? It all seems to depend on how successful you are in attracting clients. In other words, one could make the reasonable assumption that you are competent in your work otherwise you would not be registered. So, if you were presented with a commission, it is reasonable to assume that the work would be completed satisfactorily and in a technically competent manner. Marketing So back to clients - how do you attract them? Why do they come to you and not someone else? My own experience included a variety of avenues. When we stated in 1998, we set about just letting people know where we were – so we sent out a huge number of letters. I then spent a large part of my time meeting and greeting, contributing articles, giving talks, and also doing some speculative work to ‘get our foot in the door’. This all came at a cost to the fledgling practice but did eventually bear fruit. 5 The real question that needs to be asked is why would anyone come to me and engage me as their architect? Early decisions What were some of our early decisions? A key one was that we employed three contractors from day 1. This was before we had any commissions. The impact of this decision is that it freed me up to market the practice. Engaging these three contractors required some funds which we borrowed against our house. It was an all in or nothing approach. Looking back at it now, it was nothing short of crazy – I had four children at the time – the youngest only one year old, and my wife had not worked for around seven years. But the strategy worked – within around 6 months, we started getting enough work to cover all our expenses and the two practice partners settled into receiving a regular income. Management decisions and tools In 1999 we moved into the next phase of the practice and made some decisions which I still apply to this day: – We engaged a senior and experienced team (our two most senior architects are now 63 years old and out of a team of 11 people we have 7 registered architects) – We didn’t buy anything unless we had the cash (I have broken this rule only recently by signing a lease purchase on a monster printer – the deal was too good to pass by) – Everyone in the firm is a contractor with an ABN (except me) – We reconcile our GST monthly and we invoice monthly – We keep an eye on the availability of funds taking into account cash in bank, work in progress and debtors list – We keep refining our fee proposal One aspect however that we started applying from the beginning and we still do, is to be generous with our clients and to trust them. Another is to be realistic with them. Clients come to us because we are experts in our field. We therefore need to be prepared to present our clients with a real picture and not simply the one that they want to see. This is fundamental to the establishment of trust between the parties. Being honest and open with each other. 6 The two Stephen Covey authors (father and son) are worth reading because they have some very good ideas. The trust matrix is just one of them. Most of us will inadvertently not deliver at some stage in our career. However, our aim should always be to under promise and over deliver. Clearly over promising and over delivering would be the pinnacle but it is not sustainable and will eventually bring you unstuck. You will develop your own rules as time goes on. My ‘101/99’ rule and ‘1-10-100’ rule are two that I remind myself of all the time. So, what is the idea behind generosity? – simply to do more than you have to. The bank balance analogy is very simple. As I said before, sooner or later we will slip up and make a mistake. Looking at the picture let’s say the mistake is worth four coins. A person who is generous with their clients will build up a healthy balance. A four-coin mistake is unlikely to affect their standing, however if your balance is low at the time you make that mistake, because you have not been generous, then your client’s reaction is likely to be less forgiving. I call this the bank balance analogy. Same mistake, different reaction. The budget In an earlier slide I showed a number of ongoing management decisions and tools established in 1999 that still work for us today. A key one is budget. We have not gone to any particular products for our management tools but simply used excel spreadsheets. This example can be set up very quickly and provides a living document that can be updated easily when significant changes occur in the firm, such as: – Adding or reducing team members – Committing to a large purchase with ongoing consequences eg maintenance) – Engaging consultants directly Cash flow The cash flow is another tool that we set up in excel. It is simply a table that lists your projects and what you anticipate invoicing against these over the proceeding few months. It too is a living document that needs regular update. 7 More importantly, I use it to guide me on what work needs to be done in the proceeding month, so that we can invoice for that particular project. I make sure that the senior team members are aware of the project milestones and that we are not caught out at the end of the month. Practice structure Now let’s turn our mind to practice structure. There are three main ways to structure your practice: – As a sole practitioner – a limiting business proposition, but it suits many architects – A partnership – A company Risks vary across these three examples, but how does your role change on the last two? It is worth spending some time looking at benchmarking data – this page is taken from the institute’s own benchmarking survey which you can have free access to if you were an A Plus member. It allows you to see how firms are structured and also to compare your own figures with others. You can see from this page for example that the vast majority of respondents are private companies with around half employing less than 6 employees. So how do you leverage your experience and expertise so that you can achieve more than you would be able to if you remained a sole practitioner? You become a broker. This allows you to reduce reliance on yourself and to generate more with the same amount of effort. Here is an image of how I imagined my job many years ago when I first set up the practice. I had a team of people working around me so what I needed to do was to keep them busy. I guess the next phase could see someone else spinning the plates for me! Back to benchmarking – here is a snapshot showing the level of profit derived from the practice. 8 You can clearly see those practices that are not performing well but also some that for some reason manage to generate 100% profit. If we disregard these extremes, we can see that the prevailing profit level appears to fall somewhere between 25% and 50% of turnover. It is a good benchmark to aim for. Here is another page that presents the chargeable time as a percentage of hours worked. Again, I am not sure how anyone can charge more than 100%, but you can see that the average line seems to fall around the 75% mark. The benchmarking data also allows you to enter your own figures and compare them with those of other practices – either within the same size range or according to performance. I was interested in this page because it showed up some useful information. Note for example: – Employee costs (including sub contractors) are the highest component – Rent of premises follows as the second highest expense – Followed by insurance Also interesting to me is the column showing figures for the (assumed) sole practitioner. This firm is generating revenue that is marginally more than the employee we spoke about before, with just over half of this going in overheads (admittedly including salary). Is it worth taking the risk of running your own practice like this? To be fair we don’t know all of the circumstances (for example it could be a part time job for a stay at home parent), however the practice risks are still real and need to be taken into account. So, let’s assume we are not sole practitioners and that we have a team. Here is a simple demonstration of a team of four people and their performance in income generation. The table shows hours worked per week, a nominal % for chargeable time, the base rate per hour and then calculations for time cost and charge out amounts. If we apply a figure for other expenses (say 50% of team cost), we can calculate a hypothetical profit figure (before principal’s salary) of 123K. Here’s another hypothetical scenario. In this example we have a team of six people and a principal whose time is only 35% chargeable. The left hand side of the spreadsheet works out how much needs to be earned by each team member’s chargeable hour to pay for the principal’s non chargeable time ($16.05). 9 This covers the principal’s income diverted to address marketing and the time being put into managing the practice. It does not address the practice ownership risk (remember the comparison we saw before between being an employee and being a business owner?) The right hand side calculates therefore how much needs to be earned by each team member’s chargeable hour to cover a nominal business risk return ($30.86). This takes the total to $46.91 per team member chargeable hour to appropriately compensate the principal both for their non chargeable time and also for their business risk. How should you practice be structured? We saw before that most practices utilise a company structure – ‘proprietary limited’. Why is that? What are the benefits of a company structure? A company is a separate legal entity – it files its own tax return. A proprietary limited company is a private company (not public) and it is limited by shares. Therefore, as a company owner you would own shares in that company – not dissimilar to the example I gave earlier of the commonwealth bank. By definition therefore, if your company practice was engaged for a project, it is the separate entity of your company that provides the service and takes the risk and not you personally. As a director of the company however you also carry risk. Your financial risk is limited then to the shareholding that you have in the company (you may have all heard about the $2 company). So, risk management is one aspect of company structures. Other benefits include: – Flexibility in movement of shareholders without changing the entity or practice itself – Tax management On this second point I strongly recommend you seek some advice and do some research if you don’t yet have an adequate understanding. This diagram reflects closely my own structure and I will explain it briefly. It is a structure that is used by many small businesses including: 10 – Professional services firms – Retail outlets – Farms A primary reason besides tax management is asset protection. The shares in the architectural company are not owned personally by the directors but by a discretionary family trust. The family trust then also owns all of the key assets controlled by you. This effectively means that you can minimise the risk of losing your built-up assets by creating a break between the professional risk carried by the firm (the company) and your personal arrangements. Tax is paid by the company and any (fully franked) dividends that are declared then make their way to the only shareholder who is your family trust. This trust can then distribute income flexibly and differently from year to year to suit your personal circumstances, claiming a tax credit for tax that was originally paid in the company. So far we have touched on: – Practice establishment – Practice ownership – Practice performance – Practice structure Practice valuation What happens if you were contemplating taking on a co-owner in your practice, or selling to an outsider? How would someone else value your practice? There are several methods that can be employed: – Multiples (based on historical figures) – probably the most commonly used – Discounted cash flow (not suitable due to the need for a long term forecast) – Net tangible assets (cleanest but excludes profit potential) – Price of recent trade in shares (more suitable to a public company) – Industry valuation benchmarks (not enough examples) The multiple applied (if we were to use the first method) then relies on some inside knowledge on how the practice operates and performs. 11 But what is the buyer buying and why are you selling? Think back to why you set up the practice in the first place. Concluding summary So in summary: – Know what you want to do – Be properly informed and educated – Have a good understanding of risks and opportunities – Value your clients – they are your best marketers – Give more than you receive – Find a business mentor 12 13