WhatisProfitPlanning?
ByKalinaPrelikj
Contents
WhatisProfit?
WhatisProfitPlanning andWhyisitImportant?
4EasyStepstoGet StartedonProfitPlanning
3AdvantagesofProfit Planning
AreThereAny DisadvantagestoProfit Planning?
AreYouProfitPlanning?
Profitplanningcanbedefinedassettinganumberofactionsthat needtobetakeninordertoachieveatargetedamountofprofitfor yourfirm
Learningaboutprofitplanningisveryusefulforeveryindustry, includingarchitecture
Andwhilegreatdesignseemslikethemostimportantthingforus architects,allbusinessesneedtobeprofitabletosurvive.
65%ofbusinessfailthefirst10years
Infact,20%ofnewbusinessesfailduringthefirst2years,followed by45%duringthefirst5and65%duringthefirst10years.
Onthatnote,problemswiththebusinessplanandlackof financingaresomeofthemainreasonsthatleadtofailure
Allofthismightseemabitoverwhelmingatfirst,butdon'tworry. Weareheretohelpyouunderstandthebasicsofprofitplanning.
WhatisProfit?
Profitisafinancialgainthatequalsthedifferencebetweenthe amountearnedandtheamountspentonoperationalcosts
Yourarchitecturefirm’sprofitistheamountyouhaveleftafter coveringallcompanyexpenses
Profitsarerequiredsothatyourfirmcanprovideemployee bonuses,fundcapitalexpenditures,andmakenewinvestments.
Typically,youwon'tknowyourexactprofituntilyourtaxreturnis completed.
However,byincludingprofitplanningintoyourbusinessplanyou canpredicthowmuchyouarelikelytoearn
“Profitisarequirementforbusiness It'snotadirtyword You’renottakingadvantageofyourclientifyou'reprofitable. It'sarequirementtodowhatyou'redoing Infact,it'sthe rewardfordoingyourjobreallywellandservingyourclients reallywell”
-MarkLePage,EntrearchitectonHowtoBuildaSuccessful ArchitectureFirm
WhatisProfitPlanningandWhyisitImportant?
Thegoalofprofitplanningistosetaprofitobjectivefora budgetingperiod.
Theactualprocessofprofitplanninginvolvesmakingcertain managementdecisionsbeforehandinordertohelpyourfirmearn moreprofit
Forexample,youcandecidetoexpandtherangeofservicesyour firmprovidesinordertogainmoreprofit.
Thiscouldmeanofferingadditionalserviceslikefeasibilitystudy orFF&E,insteadofprovidingthebasicarchitecturalservices
WhatisProfit?
Whyprofitplanningisimportant?
ProfitPlanningHelpsYourFirmStayonTrack
Yourprofitplanwillnotonlytellyouhowyourfirmcurrentlyearns profit,butitwillalsogiveyouaroadmaptofollowforfuture growth
“Thefirststepisfiguringoutwhereyouwanttogo Ifyoudon't haveamap,you'llnevergetthere.You'lljustkeepdriving aroundincircles Thesecondstepafteryouknowwhereyou wanttogoistounderstandthebasics.Itdoesn'thavetobe superdifficult Thatbusinessplancouldbeononepage The samethingwithyourfinancialmanagementplan.”
-MarkLePage,EntrearchitectonHowtoBuildaSuccessful ArchitectureFirm
Imaginethatyousuccessfullyreachedyourprofitgoalsforthe previousyearbyfollowingyourprofitplan
Now,youcantakeastepbackandusethatdatatounderstand whichdecisionshadthelargestimpactonyourprofitability
Forexample,let’ssaythatonelargerprojectbroughtyoufarmore profitthanseveralsmallprojectswhichalsotookmoreofyour time
Withthisinmind,youwillknowthatprioritizinglargeprojectscan bringyourfirmmoreprofit.
ProfitPlanningProvidesAnswersAboutYourBusiness
Whencreatingyourfirstbusinessplan,youneedtoaskyourself these3questions:
Whatareyourinitialbusinessgoals?
Howmuchdoyouneedtoearntobreakeven?
Wouldyouratherstartstrongorgrowyearafteryear?
Thegoodnewsis-allofthiscanbeansweredwithprofitplanning
Forexample,youcanfindouthowmuchyouneedtoearntobreak evenbycalculatingallofyouroperationalcostsfortheyear.
Thatwayyouwillknowtheamountyourfirmneedstoearnto coverthoseexpenses
Or,youcancalculatetheamountthatyouwillneedtoearninthe nextfewbudgetingperiodstoseewhetheryourplanforgrowthis realistic
ProfitPlanningLetsYouPutPeopleFirst
Mostofthetime,we’resofocusedondeliveringgreatdesignsto ourclientsthatweforgetaboutourteammemberswhowork reallyhardonthosegreatdesigns.
Butinordertotakecareofyouremployees,youneedtomake enoughprofittoactuallyinvestinthem
Havingaprofitplaninplaceallowsyoutoallocatemoneyinto trainingandeducationforyourteammembers Itthennotonly helpsthemgrowtheircareer,butitalsohelpsyourfirmtohave employeeswhowanttostayandlearn
“Butwhatneedstochangeisthatforthatcompanytoremain inanarchitecturalfieldorprofession,forthatorganizationto thriveandmakeenoughprofittoinvestintheirpeople,get themmorevacationtimeandallthethingsthattheywant,the learningandeducationonthesidesotheycancontinueto grow,thatcompanyhastocarefortheirpeople.”
-RandyDeutschFAIA,UniversityofIllinoisonHowtoThinkand AdaptlikeanArchitect
4EasyStepstoGetStartedonProfitPlanning
Wecovered3bigreasonswhyprofitplanningisimportantforyour architecturefirm
Now,let’stakealookatthese4stepsthatyoucantaketostart planningyourprofit.
4stepstoplanyourprofit
Setacleartargetforyourannualprofitandafewobjectivesthat youneedtofulfillthroughtheyear
Howmuchwouldyouliketomakeinayear?
Thenyoucansetmonthlyorquarterlyprofitgoals.
Thisway,youcanhaveamorerealisticideaofhowmuchwork needstogetdoneinthatperiodfortheseobjectivestobemet
It’salwaysbettertoslightlyunderestimateratherthan overestimateyourexpectedprofit.
2-MakeaListofYourExpenses
Gettingintodetailisthekeytosuccessfulprofitplanning
So,besuretowritedownalltheoperationalexpensesofyour business.
Thismeansthatyouneedtocalculateyourdirectlaborcostsand overheadcosts.
Thesecostsincludetheannualsalariesforyouremployeesandall additionalexpensessuchassoftware,rentandutilities
Thisway,youcanknowifyouarespendingmorethanthe estimatedbudgetallowsyouto.
Ifthat'sthecase,youcaneithercutdownoncostsoradjustyour pricemodel.
Youcanusuallydothiseasilyinaprofitandlossstatement.
3-CalculateYourProfitMargin
Aprofitmarginistheamountbywhichtherevenuefromyour servicesexceedsthecostsofthefirm
Yourprofitmarginisreallyimportant,sinceitkeepsyourbusiness alive
Theaveragenetprofitmarginacrossdifferentindustriesis771%
However,mostArchitecturefirmshaveonlyaround6% profitability
Architecturefirmprofitmarginisonly6%
Youcancalculateyournetprofitmarginusingthisformula:
Profitmarginformula
(Netprofit÷Revenue)x100=Netprofitmargin
Thiswillhelpyouunderstandhowmuchyouneedtoincreaseyour revenueorloweryourcoststokeepthedesiredprofitmargin.
4-VisualizeYourProfitability
MonographPlannedProfitReport
AtMonograph,weknowhowdifficultitcanbetounderstand financialdata
Thisiswhyourprojectmanagementsoftwarenowincludesa featurethatcanhelpyouvisualizeyourprofitability
PlannedProfitReportcanletyouseeyourprofitmonthbymonth basedonalltheprojectsacrossyourfirm
Thisway,youcanseeyourprofitsfromthepasttothefutureona reportandunderstandwhenandwhereyouneedtointervene.
Thesoftwareletsyoufilteryourprofitabilitybasedonthestatusof yourfirm’sprojects(active,proposals,etc.)andthephasefee types
Ontheotherhand,ProfitDriversletsyouseewhichprojects,team members,phasesandclientsdriveyourprofitability.
Soyoucanmakegooddecisionsthatdrivegoodprofit.
Havingallofthisdatashownintheformofsimplegraphscanhelp youlearnhowtoimproveyourfirm’sfinancialhealth,without havingadegreeinfinance.
Ifyouwanttotakecontrolofyourprofitability,getstartedwith Monographtoday
Aswementionedearlier,profitplanningwillprovideyouwithan efficientwaytosetandachieveyourprofitgoals
However,itbringsevenmoreadvantagesforyourfirm
3AdvantagesofProfitPlanning
1-YouCanSetClearObjectivesAcrosstheFirm
Creatingadetailedprofitplanwillmakeyourbusinessstrategy muchclearerforeveryoneinvolvedinordertomakeyour architecturefirmprofitable
Bysettingacommongoal,youcanprovideclearobjectivesfor bothownersandarchitectsandgeteveryoneinyourfirmonthe samepage
Yourprofitplanningisnotonlyaboutcashinandcashout You alsowanttodecidewhichprojectsweremostenjoyableand successful-andthenplanhowtogetmoreofthesame
Byhavingaprofitplan,itwillbeeasierforyoutomakeinformed decisionsonhowmanyandwhattypesofprojectsyoushould pursuetoachieveyourfinancialgoals.
Forexample,let’ssaythatontheProfitDriversyoucanseethat workingoneducationalbuildingscanincreaseyourprofits
Byknowingthis,youcansetanobjectivetomakemoreproposals forthatprojecttype.Andyourteamcanfollowthisgoalquarterby quarter
2-YouCanEvaluateYourEfficiencyandMaketheRightChanges
Ifyoudon’tsetspecificprofitgoals,youwillneverbesurewhether yourreturnsaresatisfactory
Andincaseyouactuallydofallshortfromyourprojections,you willprobablywanttoknowwhy.
Tofigurethisout,youcanevaluateyourprojects,teams,clients anddesignphasesandlearnwhatneedstobeimproved
Forexample,schematicdesignisusuallythephasewherepeople burnalltheirfeesbecauseprojectteamsarespendingtoomuch timeiteratingonconcepts.
Whilelargefirmswithhighfeescanusuallygetawaywithendless cyclesofiterationstogetadesignright,smallfirmscan’t
SoAdamRuffin,PartneratARCHITECTUREFIRMtookamore straightforwarddesignapproachbecausetheydon’thaveenough timeorprofitmargintoindulgeinlotsofiteration.
“Itdoeshelpusgettothepointmorequicklyandstart thinkingaboutdetailsandmaterialitymorequickly,andstart thinkingaboutthewaylightmovesthroughaspace immediatelyratherthanhavetoworryaboutthehundredth iterationbeingtheperfectform.Thebuildingnevergetsdone. We'vefailed Andwehavedeadlines Wehavemilestonesand wehavethingstomeetinacertainamountoftimeandfora certainamountofmoney”
-AdamRuffin,PartneratARCHITECTUREFIRMonHowToLead Award-WinningProjects
3-YouCanMakeSmartInvestments
Torunasuccessfulfirm,weneedtoinvestinmarketingand businessdevelopment-activitiesthatactuallydriveprofits.
Buthowdoweknowwhatwecanbudgetinformarketing?
Trackingyourprofitsandhoursisthefirststeptosettinga sustainablemarketingbudget.
“Areyouprofitableasafirm?Andifyou'renotsure,that'sthe problemyouneedtosolvefirst
Youneedtomakesurethatthenumbersaregood Youneed toknowwhat'sgoingoninyourfirm.Youneedtoknowhow muchbillableversusnon-billablehoursthatyouandyour teamareputtingin.Andyouneedtoknowitprecisely.”
-HopeTrory,FounderofHOPEWORKSDESIGN
Withoutakeeneyeonyourbooks,it’simpossibletomanagea sustainablemarketingplanworthpayingfor.
AreThereAnyDisadvantagestoProfitPlanning?
Therearenodisadvantagestoprofitplanning.
Infact,planningprofitisdefinitelyusefulforbothlargerand smallerbusinessesandarchitecturefirms
However,rememberthattherearelimitsonwhatcanbe accomplished.
Youshouldknowthattheeffectivenessoftheplanningprocessis onlyasgoodasthedatayouuse.
Incorrectorincompletedataregardingyourfirm'sexpensesand gainswillnotprovideyouwithcorrectresults
Keepthisinmindwhileworkingonyourprofitplantogetthebest results
AreYouProfitPlanning?
Tosumitup,profitplanningcandefinitelyhelpyourpracticestay ontrack.
Itcanalsobringmanyadditionaladvantagesforyourfirm.
Toprofitplanmoreeffectively,getstartedwithMonographtoday.
Keepreading
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