P R O FIT: A S M A LL M A R G IN FO R E R R O R

A IA P ittsburgh LE A D B Y D E S IG N , B U ILD P ITTS B U R G H 2014

S tephen M cC arron A ssis tan t V ice P res ident M arke t M anager F irs t Federa l S avings B ank

Credit(s) earned on completion of this course will be reported to A IA C E S for AIA members. Certificates of Completion for both AIA members and non-AIA members are available upon request. Th is course is reg is te red w ith A IA

C E S fo r con tinu ing pro fess iona l educa tion . A s such , it does no t inc lude conten t tha t m ay be deem ed or construed to be an approva l o r endorsem ent by the A IA o f any m ateria l o f construction o r any m ethod or m anner o f handling, using, distributing, or dealing in any material or product. _______________________________________ Questions related to specific materials, methods, and services will be addressed at the conclusion of this presentation.

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C opyrigh t M ateria ls

B usinesses tha t a re no t p ro fitab le fa il. In the p ro fess iona l des ign industry, open d iscuss ion o f fees, p ro fit, and associa ted m arg ins is d iscouraged by genera l counse l and p ractica lly taboo . B u t in a c lim ate w here m arg ins m ust be com petitive , it is necessary to understand the law tha t governs them , the m ethods and techno log ies ava ilab le to ca lcu la te them , and the facto rs tha t in fluence them .

C ourse D escrip tion

Learn ing O b jectives

1. U nderstand the S herm an A ntitrus t A ct. 2 . Learn how to ca lcu la te your firm ’s C ritica l N um bers . 3 . Iden tify Trends tha t im pact p ro fit m arg ins. 4 . E xp lo re Techno log ies ava ilab le to ass is t p ro fess iona ls in p ro fit track ing .

The S herm an A nti-Trust A ct

• The S herm an A nti-Trust A ct 1890 (p rim ary au thor S en. John S herm an, R - O H ) w as in tended to p roh ib it bus iness activ ities deem ed “non-com petitive ”. • The A ct passed in d irect response to the onse t o f “m onopo lies” and “ca rte ls” as the U n ited S ta tes en te red its G ilded A ge. • The A ct has been in te rp re ted to p ro tect the concept o f “com petition ”, no t com petito rs o r consum ers. • The constitu tiona l bas is fo r the A ct is the Federa l G overnm ent’s au thority to regu la te in te rs ta te com m erce . • S ubsequent A cts inc lude the C layton A nti-Trust A ct (1914) and the R ob inson-P atm an A ct (1936).

A Three-P art Law

I. S E C TIO N 1 . D e linea tes and p roh ib its specific m eans o f an ti-com petitive conduct. II. S E C TIO N 2 . Incorpora tes end resu lts tha t a re an ti-com petitive in na tu re . For instance , an en tity m ay act w ith in the techn ica l le tte r o f the law, bu t s till v io la te its in ten tion . III. S E C TIO N 3 . E xtends the p rov is ions o f S ections 1 and 2 to U .S . Territo ries and the D is tric t o f C o lum bia . A v io la tion o f the law m ay be o f a “P er se” o r “R u le o f R eason” type .

P rinc ip les o f P ractice , A m erican Institu te o f A rch itects 1909

• The m em bersh ip is g row ing . • Fee schedu le estab lishes base , m in im um ra te o f 6% . • G ra tu itous w ork, advertis ing , and undercu tting a re “to be condem ned”. • Just basic services and a regular coffee, please!

1971 and 1990 C onsent D ecrees

N either the Institu te (A IA ) nor any com ponent is perm itted to have a m andato ry fee schedu le o r recom m ended fee gu ide lines tha t m em bers a re expected to fo llow. P ro fess iona l fee schedu les have been he ld to be un law fu l p rice fix ing . W hen asked about fees tha t a rch itects custom arily charge , a com ponent shou ld respond tha t fees a re a m atte r fo r nego tia tion be tw een c lien t and a rch itect. H ow ever, it is appropria te fo r com ponents to d is tribu te in fo rm ation about types o f fee a rrangem ents, lum p sum , percen tage o f construction cost, hourly ra tes . . . D iscuss ion o f fees a t chap te r m eetings shou ld no t be a llow ed. M em bers shou ld m ake the ir ow n independent dec is ions on w hat to charge fo r the ir se rv ices. P ream ble

The G ood, the B ad, and W hat w e a re N O T go ing to D iscuss

G O O D : P ro fess iona ls a re in no w ay restra ined , d irectly o r ind irectly, as to the ir p ro fess iona l fees. B A D : A n industry w ide p ressure to low er fees is deem ed as the success o f the A n ti-Trust A ct in the court system . TA B O O : 1 . C om petito rs ga thering . (A n “agreem ent”.) 2 . F ix ing p rices. (L im iting “com petition ”.) 3 . C onsp iring to fix p rices. (Im pacting “in te rs ta te com m erce”.)

The F irm , C om position and O rgan iza tion

F IR M S IZE • The s ta tis tica l average , as recorded by the A IA fo r a rch itectu re firm s is 9 -10 persons. F IR M C O M P O S IT IO N • R eg is te red p ro fess iona ls . • N on-licenses g raduates. • Techn ica l s ta ff, des ign and non-design o rien ted . • B usiness adm in is tra tion . P R A C TIC E TY P E • G enera l p ractice . • S pecia lty firm - specia lty p ro jects and serv ices. • M u lti-d isc ip line .

WHO IS YOUR NUMBERS GURU?

The Too ls

P R O FE S S IO N A L S E R V IC E S ERP • E n te rp rise resource p lann ing ( ERP) is a bus iness m anagem ent so ftw are— usua lly a su ite o f in tegra ted app lica tions— that a com pany can use to s to re and m anage da ta from every s tage o f bus iness, inc lud ing : P ro ject p lann ing , cost and deve lopm ent, se rv ices, m arke ting and sa les. • A x ium • D e ltek • B illQ u ick • S age • M icroso ft D ynam ics • C learv iew • N e tS u ite

C ritica l N um bers

C PA

B A N K E R

F IN A N C IA L A D V IS O R

FA M ILY FR IE N D

M A N A G IN G

V S .

U N D E R S TA N D IN G

D oes your num bers guru au thor your firm ’s p roposa ls?

D efin itions

• R E V E N U E S / G R O S S P R O FIT M A R G IN • P R O FIT and LO S S S TATE M E N T / B A LA N C E S H E E T • D E B T S E R V IC E C A LC U LATIO N / C A S H FLO W C O V E R A G E R ATIO • R E TA IN E D E A R N IN G S • D E B T TO E Q U ITY R ATIO (LE V E R A G E )

Incom e S ta tem ent

•N et P ro fit •G ross P ro fit (C ost o f G oods S o ld ) •O pera ting P ro fit •N et Incom e

S A M P LE

B alance S heet

S A M P LE

•C urren t R atio •A ccounts R ece ivab le •C urren t vs. Long-Term D ebt •R eta ined E arn ings •D ebt to E qu ity R atio (Leverage)

D ebt to E qu ity R atio (Leverage)

M ore deb t and h igher leverage resu lts in a sm a lle r overa ll m arg in fo r e rro r; Less deb t can accom m odate s low dow ns in w ork and sm alle r p ro fit m arg ins. U nderstand ing the ba lance sheet and deb t ca lcu la tion a llow s fo r the genera tion o f com petitive p roposa ls w h ich a re s till p ro fitab le .

N um bers in S um m ation

W H Y S TU D Y Y O U R B A LA N C E S H E E T?

M anag ing payab les and rece ivab les a llow s a firm to m anage cash be tte r. P ayab les and rece ivab les a re the key ind ica to r o f the firm s “C ash C ycle ”. Long te rm and short te rm deb t can a llow you to fo recast yearly to ta ls .

•

F inancia l A na lys is

S A M P LE

C ash F low C overage R atio

N et Incom e + In te rest +D eprec ia tion /A m ortiza tion -D is tribu tions =Cash Flow Available for Debt Service (CFADS) A ll M onth ly D ebt P aym ents X 12 = Annual Debt Service (ADS)

CFADS / ADS = Cash Flow Coverage Ratio (Debt Service Coverage)

Facto rs a t W ork

W ho understands and app lies the num bers?

C ritica l num bers im pact and adv ise as to s ta ff m anagem ent and proposa l genera tion .

W ho m anages your firm ’s num bers?

It is the ro le o f an A ccountan t to crunch num bers, no t necessary adv ise .

D o you have the too ls to track the num bers?

S oftw are shou ld be usab le , w ith the appropria te leve l o f job and accounting in te rface .

This concludes The American Institute of Architects Continuing Education Systems Course

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