One of the key factors that contribute to your architecture firm’s success is budgeting. It is as important to plan the firm’s budget before setting up your firm as it is to review it on an ongoing basis. The budget factors in various revenue sources and expenses including direct costs of rentals, utilities, equipment, labor as well as professional services revenue and overhead expenses.
As a professional, it is also important to be aware of your liabilities. Your clients can file lawsuits for alleged or actual errors, negligence or malpractice. Fighting these claims can seriously impact your firm’s budget. Check this website to find out more about professional liability insurance for architects.
Operating Versus Capital Budget
If your architecture firm is a startup, it is important to know the difference between capital, budget, and operating budgets. Many small architecture firms often combine the two. Capital budgets are typically long-term investment strategies although they are updated annually sometimes.
This is used to invest in major purchases including IT equipment, workstations, architecture software or other office heavy equipment. These are also termed fixed assets in the company’s balance sheet. These assets depreciate over time and may have to be replaced as needed.
On the other hand, operating budgets are those that are required to manage day-to-day expenses and are typically short-term expenses. These comprise costs related to services, small consumables, labor, and tools.
Preparing your annual architecture firm budget
The basic steps involved in preparing your firm’s annual budget are:
Review the previous year’s budget: If your architectural firm has been in business for at least a year, the first step is to look at the previous year’s budget to develop this year’s budget.
List sources of revenue: Calculate your total revenue from all sources including commissions earned, architectural fees, or other income sources. Compute the total expected annual income from this list.
Estimate expenses: The next step is to determine your expenses including cost of utilities, rentals, payroll, equipment, facilities costs, insurance, and other expenses. Use industry-specific software to estimate project timelines, direct costs of managing the project and other expenses. Maintaining key information on your architect projects will enable you to estimate workload, labor cost, revenue and billing rates.
Establish your profit goal: Also described as a return on investment (ROI), the profit is a percentage of the firm’s total expenses. Many experts recommend setting a profit goal of 20 percent. Adding the profit goal to your expenses will give you a net revenue goal for the year.
For instance, if your total expenditure is $400,000, your profit goal is 20 percent of this or $80,000 and the net revenue goal is $480,000. Once you have these figures for your firm, the next step is to establish the ideal billing rates that will help you achieve your profit goal.
Cut unnecessary expenditure: Once you make a list of expenses, you may discover how much and where your money is spent and which ones are unnecessary. Determine where you can reduce or eliminate expenditure.
Confirm the total: Recalculate your expenses and revenue to ensure your expenses are not more than your expected revenue.
Record actual expenses and revenue: Make two columns in your budgeting book right next to the expenses and record the actual income and expenses incurred in these. This will help you understand, track and adjust your budget on an ongoing basis.