These re-constructed notes are from a few of my comments as a member of a three-architect panel presentation at the AIA/SCV on July 22, 2011 for the members of the Young Architects Forum that are considering starting their own architectural firms.
Question: What is the most important advice you can give us regarding starting our own architectural practices.
EB: Cutting straight to the chase, I would say that starting out, the most important thing is to keep your overhead low. Business is a simple equation of cash-in and cash-out. It’s called cash flow, and it’s like breathing for your business. It’s always “cash in and cash out”. If you can learn to manage cash flow and you can continue to get work, you can maintain your business. That doesn’t mean that you will be successful, or get wealthy, it just means that you can usually stay in business if you can maintain the cash flow. Now the other part of that equation is that you need to continue to get work. But if you have really low overhead, you can survive lean times and times when you don’t have much work. You have probably heard stories about businesses that start up anticipating a steady or increasing revenue stream. So there is a tendency to establish a steady and increasing rate at which they take on monthly fixed overhead expenses. Things like leased office equipment, office rent, monthly advertising costs like yellow pages ads, company cars, insurance, telephone and internet are all fixed monthly overhead that you are under contract to pay whether you have any income or not. Now, if and when you are ready to get employees, you will really be crossing over into a whole other level of fixed expenses.
Question: Some of those things you might be required to have like telephone and rent, would you not?
EB: You might need to pay for a telephone and internet line, but let’s say you’ve been laid off and are out of work and have one or two small projects under contract starting out, then I would advise you to work out of your house. Basically, starting out on small projects clients don’t really care if you have a fancy office, they know that you are just starting out and are probably hiring you because they either know you or because they consider you a bargain. But in any case they believe that you can solve their problem and that’s the important thing.
Question: You said that the other part of the equation was continuing to get work. What advice can you give the group on getting new business? What are the best sources, and do you use advertising?
EB: If indeed you are going to maintain monthly expenses, then you are going to need a pretty steady source of work to support the cash flow needed to meet those monthly expenses. Balancing cash flow is always important. But balancing workflow when you have employees becomes critical.
So, the sources for getting work vary with each individual and by the type of work you are seeking. If your expertise is in multifamily, then your clients are going to be largely developers. If your expertise and focus is in single-family homes, then you are dealing with a broader audience. In any case, I have found that word of mouth referrals is far and away the best and most commonly used way of finding new clients. As far as advertising, it doesn’t work in my experience. Don’t get locked into expensive yellow pages advertising. It might work for attorneys, but you can probably tell by the lack of ads placed by architects that their main use of the yellow pages is just to provide a way for people to find them.
Question: Is there a type of client or project that you would advise to stay clear of?
EB: I would say that you should only take on projects that you know that you can handle. Don’t get in over your head. If you cannot provide good service, then your client will not be happy and your reputation will suffer. It’s when the they expect more than they are getting that problems arise, so you need to manage expectations. Make sure that they are realistic. It can take a lifetime to build up a good reputation, and only one disgruntled client to tear it all down.
Choosing good clients and not settling for bad ones is probably as important as any other thing you could do for your business success. Good clients expect to pay a fair price for a good product, and are not interested in combative or litigious relationships. Bad clients can be tough to deal with and can sometimes be slow payers, or not pay at all. Most commonly it’s the last payment that they will dispute. It’s because the project is to the point that they don’t need you anymore and you no longer have leverage. Don’t wait until the end to send large invoices. As a professor of mine said, “bill early and often”. It’s a lot easier for the client to make many small payments and it keeps even out the cash flow.
Beware of those clients who want to use you. Let me preface that by saying that everyone in the building industry, and even private clients, know that we are all hungry right now. So sometimes people will be looking for the cheapest service they can get. Or they will be looking for someone that they can intimidate and extract more services from than the scope of work in the contract. These types of people seem to come out of the woodwork during economic down times. In real estate they are called bottom feeders, and they are looking to leverage you or use you to their advantage. The other thing to be aware of is the carrot on the stick deal. If a potential client asks you to give them a deal on your fees for their first project, hinting or promising, that they will use you on their following projects, then you should probably run the other way. But being hungry and hopeful, which we all are, I know that sometimes it’s irresistible.
As far as liability is concerned in all situations, you need to learn to practice defensively. Learn to sense and know the things that might incur a liability risk and deal with them. Most of that will be gained by experience, but you should educate yourself about what issues come up the most. For instance return construction submittals within the time specified in the contract or you could be blamed for a construction delay. Know the AIA contracts, especially the General Conditions for Construction, or the contracts that are being used on your project.
Question: Are there tools that you recommend to track cash flow?
EB: I use QuickBooks Pro, but in any case you need to be using some form of computerized accounting system.
Question: As far as the actual project itself what is the most important thing to starting and maintaining a practice?
EB: Make the client happy. Make sure that they have realistic expectations. If their expectations match what their perception of their experience is, they will be happy. Whatever you do don’t make promises that you don’t deliver on, and even if you have so say you are behind schedule or are having issues return all calls promptly. It lets the client know that you respect their time and their concerns and gives them an opportunity to adjust their expectations. Happy clients will refer you. For me, I look for repeat clients. I like to find a good client and keep them happy for life.
Question: What should my budget be for starting a new business?
EB: It depends. The basic concept of the Profit and Loss Statement is income minus expenses leaves net income, or what you get to keep. If you know and can realistically anticipate the income, and you know what you need to live, you can work the equation to show you what expenses you can justify. Likewise, if you know how much you need to make and know what your expenses are then you can project how much you will need as gross income to get to where you want to be.
