Profit planning can be defined as setting a number of actions that need to be taken in order to achieve a targeted amount of profit for your firm.
Learning about profit planning is very useful for every industry, including architecture.
And while great design seems like the most important thing for us architects, all businesses need to be profitable to survive.
In fact, 20% of new businesses fail during the first 2 years, followed by 45% during the first 5 and 65% during the first 10 years.
On that note, problems with the business plan and lack of financing are some of the main reasons that lead to failure.
All of this might seem a bit overwhelming at first, but don't worry.
We are here to help you understand the basics of profit planning.
What is Profit?
Profit is a financial gain that equals the difference between the amount earned and the amount spent on operational costs.
Your architecture firm’s profit is the amount you have left after covering all company expenses.
Profits are required so that your firm can provide employee bonuses, fund capital expenditures, and make new investments.
Typically, you won't know your exact profit until your tax return is completed.
However, by including profit planning into your business plan you can predict how much you are likely to earn.
“Profit is a requirement for business. It's not a dirty word. You’re not taking advantage of your client if you're profitable. It's a requirement to do what you're doing. In fact, it's the reward for doing your job really well and serving your clients really well.”
- Mark LePage, Entrearchitect on How to Build a Successful Architecture Firm
What is Profit Planning and Why is it Important?
The goal of profit planning is to set a profit objective for a budgeting period.
The actual process of profit planning involves making certain management decisions beforehand in order to help your firm earn more profit.
For example, you can decide to expand the range of services your firm provides in order to gain more profit.
This could mean offering additional services like feasibility study or FF&E, instead of providing the basic architectural services.
Profit Planning Helps Your Firm Stay on Track
Your profit plan will not only tell you how your firm currently earns profit, but it will also give you a roadmap to follow for future growth.
“The first step is figuring out where you want to go. If you don't have a map, you'll never get there. You'll just keep driving around in circles. The second step after you know where you want to go is to understand the basics. It doesn't have to be super difficult. That business plan could be on one page. The same thing with your financial management plan.”
- Mark LePage, Entrearchitect on How to Build a Successful Architecture Firm
Imagine that you successfully reached your profit goals for the previous year by following your profit plan.
Now, you can take a step back and use that data to understand which decisions had the largest impact on your profitability.
For example, let’s say that one larger project brought you far more profit than several small projects which also took more of your time.
With this in mind, you will know that prioritizing large projects can bring your firm more profit.
Profit Planning Provides Answers About Your Business
When creating your first business plan, you need to ask yourself these 3 questions:
- What are your initial business goals?
- How much do you need to earn to break even?
- Would you rather start strong or grow year after year?
The good news is - all of this can be answered with profit planning.
For example, you can find out how much you need to earn to break even by calculating all of your operational costs for the year.
That way you will know the amount your firm needs to earn to cover those expenses.
Or, you can calculate the amount that you will need to earn in the next few budgeting periods to see whether your plan for growth is realistic.
Profit Planning Lets You Put People First
Most of the time, we’re so focused on delivering great designs to our clients that we forget about our team members who work really hard on those great designs.
But in order to take care of your employees, you need to make enough profit to actually invest in them.
Having a profit plan in place allows you to allocate money into training and education for your team members. It then not only helps them grow their career, but it also helps your firm to have employees who want to stay and learn.
“But what needs to change is that for that company to remain in an architectural field or profession, for that organization to thrive and make enough profit to invest in their people, get them more vacation time and all the things that they want, the learning and education on the side so they can continue to grow, that company has to care for their people.”
- Randy Deutsch FAIA, University of Illinois on How to Think and Adapt like an Architect
4 Easy Steps to Get Started on Profit Planning
We covered 3 big reasons why profit planning is important for your architecture firm.
Now, let’s take a look at these 4 steps that you can take to start planning your profit.
1 - Set Your Profit Goal
Set a clear target for your annual profit and a few objectives that you need to fulfill through the year.
How much would you like to make in a year?
Then you can set monthly or quarterly profit goals.
This way, you can have a more realistic idea of how much work needs to get done in that period for these objectives to be met.
It’s always better to slightly underestimate rather than overestimate your expected profit.
2 - Make a List of Your Expenses
Getting into detail is the key to successful profit planning.
So, be sure to write down all the operational expenses of your business.
This means that you need to calculate your direct labor costs and overhead costs.
These costs include the annual salaries for your employees and all additional expenses such as software, rent and utilities.
This way, you can know if you are spending more than the estimated budget allows you to.
If that's the case, you can either cut down on costs or adjust your price model.
You can usually do this easily in a profit and loss statement.
3 - Calculate Your Profit Margin
A profit margin is the amount by which the revenue from your services exceeds the costs of the firm.
Your profit margin is really important, since it keeps your business alive.
The average net profit margin across different industries is 7.71%.
However, most Architecture firms have only around 6% profitability.
You can calculate your net profit margin using this formula:
(Net profit ÷ Revenue) x 100 = Net profit margin
This will help you understand how much you need to increase your revenue or lower your costs to keep the desired profit margin.
4 - Visualize Your Profitability
At Monograph, we know how difficult it can be to understand financial data.
This is why our project management software now includes a feature that can help you visualize your profitability.
Planned Profit Report can let you see your profit month by month based on all the projects across your firm.
This way, you can see your profits from the past to the future on a report and understand when and where you need to intervene.
The software lets you filter your profitability based on the status of your firm’s projects (active, proposals, etc.) and the phase fee types.
On the other hand, Profit Drivers lets you see which projects, team members, phases and clients drive your profitability.
So you can make good decisions that drive good profit.
Having all of this data shown in the form of simple graphs can help you learn how to improve your firm’s financial health, without having a degree in finance.
If you want to take control of your profitability, get started with Monograph today.
3 Advantages of Profit Planning
As we mentioned earlier, profit planning will provide you with an efficient way to set and achieve your profit goals.
However, it brings even more advantages for your firm.
1 - You Can Set Clear Objectives Across the Firm
Creating a detailed profit plan will make your business strategy much clearer for everyone involved in order to make your architecture firm profitable.
By setting a common goal, you can provide clear objectives for both owners and architects and get everyone in your firm on the same page.
Your profit planning is not only about cash in and cash out. You also want to decide which projects were most enjoyable and successful - and then plan how to get more of the same.
By having a profit plan, it will be easier for you to make informed decisions on how many and what types of projects you should pursue to achieve your financial goals.
For example, let’s say that on the Profit Drivers you can see that working on educational buildings can increase your profits.
By knowing this, you can set an objective to make more proposals for that project type. And your team can follow this goal quarter by quarter.
2 - You Can Evaluate Your Efficiency and Make the Right Changes
If you don’t set specific profit goals, you will never be sure whether your returns are satisfactory.
And in case you actually do fall short from your projections, you will probably want to know why.
To figure this out, you can evaluate your projects, teams, clients and design phases and learn what needs to be improved.
For example, schematic design is usually the phase where people burn all their fees because project teams are spending too much time iterating on concepts.
While large firms with high fees can usually get away with endless cycles of iterations to get a design right, small firms can’t.
So Adam Ruffin, Partner at ARCHITECTUREFIRM took a more straightforward design approach because they don’t have enough time or profit margin to indulge in lots of iteration.
“It does help us get to the point more quickly and start thinking about details and materiality more quickly, and start thinking about the way light moves through a space immediately rather than have to worry about the hundredth iteration being the perfect form. The building never gets done. We've failed. And we have deadlines. We have milestones and we have things to meet in a certain amount of time and for a certain amount of money.”
- Adam Ruffin, Partner at ARCHITECTUREFIRM on How To Lead Award-Winning Projects
3 - You Can Make Smart Investments
To run a successful firm, we need to invest in marketing and business development - activities that actually drive profits.
But how do we know what we can budget in for marketing?
Tracking your profits and hours is the first step to setting a sustainable marketing budget.
“Are you profitable as a firm? And if you're not sure, that's the problem you need to solve first.
You need to make sure that the numbers are good. You need to know what's going on in your firm. You need to know how much billable versus non-billable hours that you and your team are putting in. And you need to know it precisely.”
- Hope Trory, Founder of HOPEWORKSDESIGN
Without a keen eye on your books, it’s impossible to manage a sustainable marketing plan worth paying for.
Are There Any Disadvantages to Profit Planning?
There are no disadvantages to profit planning.
In fact, planning profit is definitely useful for both larger and smaller businesses and architecture firms.
However, remember that there are limits on what can be accomplished.
You should know that the effectiveness of the planning process is only as good as the data you use.
Incorrect or incomplete data regarding your firm's expenses and gains will not provide you with correct results.
Keep this in mind while working on your profit plan to get the best results.
Are You Profit Planning?
To sum it up, profit planning can definitely help your practice stay on track.
It can also bring many additional advantages for your firm.
To profit plan more effectively, get started with Monograph today.