In support of Burwell Consulting, William M. Burwell writes articles sharing his experience in four keystone practice areas: Design; Marketing, Practice Management and Project Management.
Practice Management Post 1.3
I had been a self employed Architect from one year out of college and it may have been 10 years later that I engaged a valued friend as a mentor to help me improve my business. Imagine the shock on my face when he asked, "What are your annual billings?, What is your overhead?, What is your profit? After stammering around the elephant in the room, I said well, we are doing OK, I make a good salary but what do you mean by profit?
Here is what my mentor told my naïve ears: "You are the business owner. You own the joint through your investment of money, time and sweat. You also work at your office. In some regards you are like your other employees in that you get a competitive salary for your work. Now if all goes well, it costs less to produce your work than the contract value, so you generate a profit beyond this cost to produce. This profit is yours, as business owner, as a reward for placing your investment of money, time and sweat at risk."
Of course I was familiar with the concept, but I had never thought of it in such a succinct manner. Like many small business owners my thinking was that I received the income, paid staff and overhead and what ever was left over was payment for my time and effort. I was thoughtlessly mixing salary and profit together. Later I had the opportunity to work with a man who taught me a refinement of the concept. He had the same formula - Income minus expenses = profit, but he taught me that as a business owner one could inflate his salary thereby eliminating profit (sorry, hardworking staff) ; or, pay a fair competitive salary which would establish a market profit (lets share our success together) ; or, frankly like I had been doing, draw down the cash as it came in with no stipulated salary and no measure of my business performance.
As owner, do NOT delegate the understanding of profit and loss to staff or a hired accountant. We were not trained as accountants, but delegating this important knowledge and understanding of your firms financial performance may either give you a false impression or an incorrect impression of your firms success. High billings and generous cash flow DO NOT necessarily indicate profitability. Some of my partnerships have experienced multi-million dollar years but showed little or no profit on operations due to higher costs and inefficient delivery systems. Check your Profit and Loss (P&L) monthly, print out your balance sheet monthly and understand the numbers. Accounting is no different than any profession, garbage in = garbage out, so don't roll the dice by relying on others for the answers you need.
There are a million variations, aberrations, tricks and details that can be introduced to shift income, portion expenses, isolate one time expenses from operations performance and as many tax planning strategies as you can count on all your fingers and toes, but that is a story for another time. I've learned that setting fair and competitive salaries for everyone and maintaining a reasonable overhead is the only true way to create a measure of your firms performance from month to month and year to year. Bingo! Listen to the numbers.
William M. Burwell is a retired Architect and Interior Designer who focused on corporate interior architecture for over 40 years in sole proprietorships, and partnerships from 9 to 120 staff. Bill retired in 2014 and began a Small Firm Marketing and Management Consulting firm to share the wisdom and experience of those 40 years. He graduated from the University of Houston College of Architecture in 1971 and now serves the College on the Dean's Committee on Excellence.