Story at a glance:
- Architects can work together across departments to reach a common goal and mutually benefit.
- Creating a profit plan can give teams a sense of where profits will be in a given year.
- The current industry average overhead rate is between 150 and 175%.
As we approach the second half of the year, many architecture firms have been looking to keep their annual profits as healthy (and high) as possible to finish this year on a strong financial note. Here, we’ve compiled five additional strategies architects can employ to run a more profitable business.
1. Eliminate silos.
Picture, for a moment, silos on a farm—tall, metal structures built specifically to store and dispense grain. By design, silos are difficult to penetrate, making it ideal to keep grain safe from pests and elemental wear and tear. In essence, the silo allows the grain to be kept to itself and only accessed when needed.
In many companies, various teams will often have a “silo mentality,” operating entirely on their own merits and rules, and neither offering nor desiring help from other teams in the company. In their mind, their team is designed to achieve a certain goal, and as long as that goal is being achieved, they don’t need to change.
While obviously some departments mechanically function differently than others, this silo mentality can ultimately be damaging to a business. If every team is operating out of its own interests, it’s not working as a cohesive unit to reach a common goal. And with less cohesion, there is less opportunity to increase profitability.
So how can you break this silo mentality?
Aside from fostering a common goal for every team to get behind, look for ways you can have different teams working together rather than separately. This may mean increasing your usage of collaborative software such as Customer Relationship Management solutions or even holding team-building exercises that encourage teamwork across departments.
2. Train employees to think like owners.
Important decisions in many businesses are often made from the top-down. That is, the owners and project managers discuss what policies they would like to enact and what directions they would like to take with their company, and they communicate those directives and instructions down the ladder to the employees.
While this concept makes sense on paper, in practice it’s not always as effective. When decisions about business functionality are only made by the ones at the very top, the employees on the lower rungs of the ladder may feel like they have less agency over their work, and, in particular, the success of the company as a whole. This can lead to employees feeling less motivated to do their best work on the job, which means less efficiency which leads to less net profit for your business.
Rather than give your employees the impression that they should “stay in their lane,” so to speak, try giving them the ability to directly foster your business’ success. Let them come to the table with fresh feedback and ideas. It’s very likely that, being on the ground floor, they have some first-hand experience with strategies that could help your business grow and/or run more efficiently.
Not only will you greatly improve communication opportunities within your business, but your employees will feel empowered to operate with ownership as a mindset, which can help them in other areas of the business (like building better relationships with clients). You could even reward and foster this ownership mentality with bonuses and recognition when an employee goes the extra mile for your business, which can encourage more of your employees to do the same.
3. Decrease overhead.
Your business’ overhead will often eat into your profits if not kept in check, so managing overhead is an important skill to master.
The first step to achieve this is understanding your business’ overhead rate (i.e. your overhead costs divided by the costs of your labor on projects). Bear in mind that the industry average as of this writing is between 150 and 175%, so as long as you’re keeping your numbers within this range, you’re in a good place.
Some architectural firms will accomplish this by outsourcing parts of their operations. For instance, you might consider looking to outside resources to handle your business’ marketing efforts and IT management, as there are often agencies that specialize in these fields and can lend their expertise to firms like yours.
Keep in mind, however, that you shouldn’t focus too much on lowering your overhead. In many situations the items or services you are spending extra money on each month can ultimately serve to make your business more efficient, and therefore more profitable.
Your aim with lowering overhead should be to find areas of your business you truly don’t need, rather than simply making cuts to lower your overhead rate as much as possible.
4. Develop a profit plan.
As an architect you’re well aware of the value of planning ahead before executing a project. So why not do the same with your profits?
Unfortunately it’s not uncommon for some businesses to only have a vague idea of what their profits will be until they’ve finished covering their overhead, or in some cases until they’ve filed their tax returns. Without solid foresight, it can be difficult to determine what money you have leftover and more so, how you can spend it in the coming year.
Consider creating a profit plan to help you get a sense of where your profits will be in a given year. There are many ways you can achieve this, but the essential steps are as follows:
Create an estimate of your average expenses. This should include your overhead rate that we mentioned earlier, the costs of your services, materials, etc.
Determine what your profit goal should be. This should include a target amount and what your business can do to get there. Make sure to factor in your average expenses as you calculate this number.
Create a net revenue goal. Once you’ve determined how much your expenses will eat into your profit goals, you can get a sense of what price you’ll need to set your services at to achieve this goal.
This is just a cursory look at what a profit plan might look like, and it will likely vary depending on what sort of business you work in. But it should at least get you on the right track to get a better sense of your profits as you go through the year.
5. Bill faster to get paid faster.
Another metric many architecture firms use as they analyze their profit is their Average Collection Period (ACP). As the name suggests, this determines the average amount of time it takes between sending a bill/invoice and when the architect collects on the invoice.
The more you do to reduce your ACP, the more you stand to profit in general. One easy way to accomplish this is to adopt an online payment solution. Rather than wait on check payments to arrive in the mail, and then go through a lengthy deposit process, an online payment solution can start processing as soon as the payment is received.
Data compiled by ClientPay showed that as much as 64% of online bills were paid the same day they were sent, further narrowing the time between sending an invoice and having cash in hand.
Plus, online payment solutions can equip your business with other tools to keep your profits flowing. For example, you might consider setting up a client on a recurring payment plan, where their payment method is automatically charged at set intervals (such as weekly, bi-weekly, etc.) Or, for on-site or in-office payments, you can offer your clients the ability to pay by QR code to make the billing process quick and easy.