Financial Well Being of a Practice - Does the Concept Work?

7m 13s

In this ARE 5.0 Practice Management Exam Prep course you will learn about the topics covered in the ARE 5.0 PcM exam division. A complete and comprehensive curriculum, this course will touch on each of the NCARB objectives for the ARE 5.0 Practice Management Exam.

Instructor Mike Newman will discuss issues related to pre-contract tasks including negotiation, human resource management and consultant development.

When you are done with this course, you will have a thorough understanding of the content covered in the ARE 5.0 Practice Management Exam including business structure, business development, and asset development and protection.

We talked about how a design practice starts with a business plan. You start with an idea, and you build up that idea and generate all the information you need to have an effective game plan and effective action plans. You know what you're gonna do. Part of that we talked about was the idea of a pro forma. So there's some sense, some financial document, even if it's very simplistic, that's projecting, this is what we think will happen. This is this idea where we're listing all the pluses and we're listing all the minuses, and hopefully we get to something that's a plus at the end. So it's sort of a projection, an idea in the future of how things might go.

The pro forma might be aimed at a set project, or it might be aimed at a one-year time or a five-year time or 10-year time. There's lots of different types of pro formas, but the idea is that it's this projection out into the world. That was part of that business plan thinking, the beginning of a project to know, is this a logical thing to get into? Now we're in that project, and we mentioned that this concept of the billable hours, so part of that business plan, part of that pro forma, is understanding how long things are gonna take and how much you can charge for them, so that we're guessing that we'll be able to do these kinds of projects, it'll take roughly this amount of time, we'll be able to charge this amount of money, so we'll have this idea of how that's gonna go into the future.

Time is money. Pro forma is about the projecting, how we think that's going to work. Well, now we're actually in the business.

Now we have the practice, the design firm practice, and we're in that project, and we have to say, all right, how do we think about the money? So there's a couple different ways of thinking about this. One of them is the idea of a profit and loss statement. There's a few different ways it gets talked about. Most people will call it a profit and loss statement. Financial statement I think is another term. There's a few other ways. But generally it's referred to as a profit and loss. The PnL system is where it's not a projection anymore. Now we're saying, all right, we've been doing this for a year, and we're gonna look at our financial year, so from the calendar year, January 1 to December 31, or maybe your financial year is July to July or something, but there's gonna be some duration of time, and in that duration of time, as we're moving along, there's gonna be amounts of money that are spent.

There's gonna be amounts of money that are made. There's gonna be sort of a series of these different things, and you're gonna be able to add them up, and that is a moment in time after a set amount of time.

So this is, we're talking about essentially the same basic idea as the pro forma, but now it's not about projecting into the future. It's about what's happening right now. So typically, when you talk about a PnL statement, it's usually regarding a year, but it could be for a month. It could be a PnL statement for a project length. It could be a PnL statement every ...

Bi-annually or something along those lines. But the idea is, these are the actual monies that went out, these are the actual monies that came in, and in that specific timeframe. This is useful, obviously, for a number of reasons. One of them is just how much money went out and how much money went in. You need to know these things in order to keep a business afloat. But the other is that it's a way of proving viability of concept, that if your PnL statement is essentially mirroring the pro forma that had been produced, then you are able to say, well, see, look.

We had this pro forma, we had a game plan, we had an action plan, and it's working, because the PnL statement is describing essentially the same basic idea. If it's very, very different, then it might be time to revisit that business plan and the action plan and the pro forma that they put together so that you would start to have these things go back and forth, but also that PnL statement, if you were gonna be talking to somebody about a loan for new computers, or a loan for a situation that you need capital for, maybe a development project or something, this is where that sort of proof of concept is understood.

You've said this is what we wanna do, but now here's how it actually is working. So the PnL statement is very important in terms of how a business actually runs, and most of the time, most young architects never really see the PnL statements, but it is something that you should be familiar with, and it's actually worth talking to the people who you are working with and actually getting them to show you that, how those things work, because it's a useful thing for you to know, and it's something that's likely to show up on the exam.

There's lots of places you can study for it as well, but in a situation where it's a situation that you know, like you're a firm, it would be very useful to see how those numbers work. Another really interesting one is the idea of a balance sheet.

So I think of it as like a little seesaw. The balance sheet is a situation where ... So, the profit and loss statement was about a set period of time, so all the money that came in, and all the money that went out in that set period of time. The pro forma was about projecting into the future, what we hoped would be happening. The balance sheet is, okay, here's a moment in time. In that moment in time, where are we? We have lots of debt, so all right, we're down here, and we've got some stuff that's lifting us up.

So, okay, what's happening right now, and if we have crushing debt and not very many prospects for money coming in, that balance is feeling pretty unbalanced. If we have a little bit of debt and a sort of constant stream of money coming through, that balance sheet is actually gonna look pretty good. It's gonna seem very plausible. It's all the same money. This is not different pools of money. It's just different ways of viewing that money. Cash flow report is just what it sounds like.

It's talking about the actual money literally going in and out, like how much money do you have on hand. Is that enough money to do the needs that you have for that period of time? So these are just different ways of looking at the same pools of money and putting them in a form that is then useful for that moment and that project. So the pro forma is useful because it's before the things have happened and you're looking, projecting into the future. The profit and loss statement is useful because, all right, we've now gone for a while and we're testing maybe this year against last year, or we're putting this year against our pro forma for next year, so we're able to look at these specific periods of time.

The balance sheet is sort of the big picture. Maybe everything's been going just fine, but ... From that initial loan we took, we're just deep, deep, deep in debt, and that balance sheet will tell us that, well, yeah, our profit and loss in terms of money in and money out is doing fine, but we're not in balance, because we have this huge loan cost coming up. So these are different ways of looking at the information in order to make it easier and better for you to make financial decisions.

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From the course:
ARE 5.0 Practice Management Exam Prep

Duration: 11h 28m

Author: Mike Newman