BRIAN PINDER- AYRES Financial Management British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the © RIBA Enterprises Ltd 2016 British Library. Published by RIBA Publishing, part of RIBA Enterprises Publisher: Steven Cross Ltd, The Old Post Office, St Nicholas Street, Newcastle Commissioning Editor: Sharla Plant upon Tyne, NE1 1RH Production: Richard Blackburn ISBN 978 1 85946 602 5 Designed & typeset by Kalina Norton/Studio Kalinka Illustrations by Peter Harpley Stock code 84985 Printed and bound by CPI Antony Rowe in Chippenham, Great Britain The right of Brian Pinder-Ayres to be identified as the Author of this Work has been asserted in accordance with While every effort has been made to check the accuracy the Copyright, Designs and Patents Act 1988 sections and quality of the information given in this publication, 77 and 78. neither the Author nor the Publisher accept any responsibility for the subsequent use of this information, All rights reserved. No part of this publication may be for any errors or omissions that it may contain, or for any reproduced, stored in a retrieval system, or transmitted, misunderstandings arising from it. in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of the copyright owner. www.ribaenterprises.com C ONTENTS FOrEwOrd VI SErIES EdITOrS’ FOrEwOrd VII AbOuT ThE SErIES EdITOrS VIII AbOuT ThE AuThOr VIII ACkNOwlEdgEmENTS Ix INTrOduCTION xI 1. SETTINg up IN prACTICE 1 ChOOSINg ThE rIghT FOrm OF buSINESS FOr yOu 1 SOlE TrAdEr ANd pArTNErShIp 1 lImITEd lIAbIlITy pArTNErShIp 2 lImITEd COmpANy 3 ThE FuNdAmENTAlS OF FINANCIAl mANAgEmENT 5 CONTrOl OF wOrkINg CApITAl 5 mulTIlEVEl mANAgEmENT 7 rAISINg FINANCE 8 SummAry 9 2. ThE FIrm FOuNdATIONS 11 bASIC bOOk-kEEpINg 11 mONThly prOFIT rEpOrTINg 13 kEy pErFOrmANCE INdICATOrS 16 lIquIdITy kpIS 17 SummAry 20 3. plANNINg ThE FINANCIAl hEAlTh OF ThE prACTICE 21 dEVElOpINg A STrATEgIC plAN 21 ThE ANNuAl budgET 22 ZErO-bASEd budgETS 23 IdENTIFyINg ThE kEy lImITINg FACTOr 23 ThE budgET-SETTINg prOCESS 24 CONTrOllINg ThE budgET 24 CApITAl ExpENdITurE budgETS 26 budgETS FOr ThE SOlE prACTITIONEr Or SmAll prACTICE 28 SummAry 28 4. prOjECT rEpOrTINg ANd CONTrOl 31 ThE CAlCulATION OF COST 32 SummAry 38 III 5. FEE prOpOSAlS – SETTINg A rEAlISTIC FEE 39 TrAdITIONAl ApprOAChES TO SETTINg FEES 41 pErCENTAgE FEES 41 lump Sum FEES 41 TImE ChArgES 42 ‘pErCENTAgE CEIlINg’ FEES 42 uNIT prICE FEES ANd FEES FOr rEpETITION 42 lICENCE FEES 42 ExpENSES 43 FEE AdjuSTmENTS ANd ChANgES 43 rEVISION TO brIEF Or ClIENT’S INSTruCTIONS 44 ACCElErATION 44 OmISSION OF wOrk IN ThE OrIgINAl brIEF Or COST OF CONSTruCTION 44 ClIENT VArIATIONS durINg ThE CONSTruCTION pErIOd 45 rESEArCh INTO AddITIONAl FACIlITIES 45 SummAry 45 6. FOrECASTINg FuTurE FEES 47 FuTurE pOSSIblE FEES 50 A COmbINEd FEE FOrECAST 52 ThE rESOurCES FOrECAST 53 SummAry 56 7. CASh FlOw mANAgEmENT 57 CASh INFlOwS 60 ACCOuNTINg FOr VAT 62 CASh OuTFlOwS 63 ACCOuNTINg FOr TAxATION 63 SummAry 64 8. CrEdIT CONTrOl 65 lATE pAymENT 67 ThE AgEd dEbTOr rEpOrT 68 ThE ‘drOp-ThrOugh’ ANd ThE ‘mulTIplIEr EFFECT’ OF bAd dEbT 70 rESOlVINg prOblEmS wITh FEES 71 mEdIATION 71 AdjudICATION 72 ArbITrATION 72 lITIgATION 72 SummAry 72 IV 9. brINgINg IT All TOgEThEr – rEpOrTINg AT prACTICE lEVEl 75 TurNOVEr ANAlySIS 76 bENChmArkINg 78 SummAry 79 10. lEAVINg ThE prACTICE – ExIT STrATEgIES 81 whAT ArE yOu lOOkINg FOr whEN yOu lEAVE? 82 ClOSINg ThE prACTICE 82 TrAdE SAlE 83 pASSINg ThE prACTICE ON TO ThE NExT gENErATION 83 SummAry 85 11. CONCluSION 87 whAT CAN pOSSIbly gO wrONg? 87 FAIlurE TO uSE STANdArd AgrEEmENTS 87 FAIlINg TO INVOICE FOr wOrk ON A rEgulAr bASIS 88 FAIlINg TO COllECT ThE AmOuNTS ThAT ArE duE 88 NOT ASkINg FOr AddITIONAl FEES whEN ThE brIEF IS ChANgEd 89 NOT ASkINg FOr AddITIONAl FEES whEN ExTrA wOrk IS AddEd 89 FAIlINg TO mONITOr prOjECT COSTS ANd CONTrIbuTION 90 lOw hIT rATE ON COmpETITIVE TENdErS 90 pOOr ESTImATION ANd FEE NEgOTIATION 91 FAIlurE TO mANAgE ThE dESIgN TEAm 91 hOw hAS ThE FINANCIAl lANdSCApE ChANgEd IN ArChITECTurE SINCE 2008? 91 AddINg VAluE 93 glOSSAry: dEFINITIONS 94 AppENdIx: uSEFul wEbSITES 95 INdEx 96 V FOrEwOrd Running an architecture business He says: ‘All of the architects I have effectively is not just a matter of ever met have been far more concerned pursuing ‘profit’ or ‘staying afloat’- about the quality of the finished building there is an ethical issue at stake too. and its design integrity than about Honouring your promises to staff, the making of money’ (page 8). His consultants and other suppliers and observation that ‘The vast majority paying them on time is a mark of your of businesses that go under simply run integrity. Expecting your clients to pay out of cash’ (page 9), leads inevitably to you promptly while your staff have to the maxim: ‘Cashflow is the lifeblood of wait for their money, or work long the practice’ (page 60). If you need to hours for nothing, is evidence of remember one thing about this subject, double standards. it’s probably that. In this lucid and practical book about Financial management of architectural a difficult subject, Brian Pinder-Ayres practice is not simple. It is complex, draws on his diverse experience of and we underestimate it at our peril. It medium-sized practices and the tax should be imaginative and creative, but affairs of many smaller firms, and offers rigorous – just like architecture. a range of proven, effective tools for keeping track of cash, looking ahead Steven Pidwill, and minimising risk. Shepheard Epstein Hunter VI SErIES EdITOrS’ FOrEwOrd By virtue of you picking up this book practitioner that you aspire to be, whilst on Financial Management, you are honing your entrepreneurial eye. either curious about the prospect of This book will equip you with the setting up in practice or are in practice, knowledge and confidence to free you but want to have a better understanding from worrying how to pay your bills of the numbers and a cost effective so that you can focus your energies oracle on your shelf. Dealing with on what you do best and then use the the finances along with business results of that productive time to attract development are perhaps the two areas more work thus ensuring financial of start-up that Architects fear the stability – a virtuous circle! most. This is most likely because many of us have not been taught this in our Written in clear language Financial architectural education. Management is an essential user guide that covers all the stages in the Financial Management has been written typical life cycle of a practice, from with a view to making this crucial aspect deciding which form of business to of running and sustaining your business adopt through annual budgeting and fee as integral to your creative practice as setting to succession planning. Within is design. its pages are the tools to deal with the concepts, language and a good steer Architects tend to be nervous of fully on how to manage both your accounts embracing the discipline of financial and accountant relationships. The management in case it somehow or humorous illustrations throughout are other detracts from what they see as the complemented by worked examples and main thrust of their practice. definitions thereby making the detailed information accessible without resort to However, far from turning you into an financial jargon. accountant, good financial management frees you up to be the creative Del Hossain and Anne Markey VII AbOuT ThE SErIES EdITOrS Anne Markey is a director of Phelan and Shanghai. By background he is Architects, a practice she founded an Architect having practiced with in 2009 with her husband Brendan some of London’s leading design Phelan. She also heads up the Projects firms including Foster and Partners Office within the Sir John Cass Faculty and ORMS. In 2012 he was Awarded of Art, Architecture and Design at ‘London’s Business Mentor of the London Metropolitan University, and Year’ for developing companies with has over twenty years experience as a social agenda and progressive an architect. Anne is a member of the ambitions. Del is also a qualified RIBA and sits on the RIBA CPD Sub- Organisational Development and Committee. She is a board member of Wellbeing Psychologist and works Catalyst Housing, one of the leading closely with leadership teams and housing associations within London Directors in the Creative Industries and the South East, where her role is on their People Strategies and team that of Design Champion. motivation. He is also a speaker at numerous universities and a former Del Hossain is the MD of the Adrem Chairman of the Bartlett Alumni. Del is Group a leading International the Joint Editor of the RIBA’s Business Architecture and Design Careers Books Series. Agency based in London, Dubai AbOuT ThE AuThOr Brian Pinder-Ayres qualified as a Brian joined YRM Architects just after chartered management accountant their successful management buyout (ACMA) in 1984 while working as a in 1997, and established the finance finance and tax analyst with Mobil function for the new business. In 2001, North Sea Ltd. He has held the most he took up the role of Finance Director senior management roles in finance at architects and planners Shepheard with Polaroid, Braxton Associates Epstein Hunter plc. He has lectured (the strategy consulting arm of major on finance and architectural practice accountancy practice Deloitte) and to students studying for the RIBA a firm of niche-market City solicitors Part 3 examination at Portsmouth Walton & Morse LLP. For five years he University, Cambridge University and worked as a management consultant London South Bank University and with chartered accountants Moores is a regular contributor to the very Rowland during which time he successful annual Part 3 programme specialised in advising professional at the University of Westminster. He firms on a wide variety of financial also lectures in financial management management issues. for the RIBA. VIII ACkNOwlEdgEmENTS Over the years, one of my strongest and which I am now putting forward in and lasting impressions when working this book – originally came from them. I with architects is their openness and have also taken a lot from the feedback generosity. I have always appreciated of the Part 3 students who have their willingness to take the time to attended my lectures over the years. share their knowledge and experience Their questions and comments have of practice with me, often in the form of helped me to focus on the areas of amusing or terrifying anecdotes. practice that are obviously uppermost in their minds and identify the issues I am particularly indebted to my fellow that seem to trouble them the most. directors and colleagues at Shepheard Epstein Hunter and to the former As ever I need to thank my wife Liz for directors of YRM Architects for their her unfailing patience, encouragement help, advice and support. I am well and support throughout this project. aware that much of what I have learnt – Ix