August 6, 2010

MONEY Basics for Architects



“If you can actually count your money, then you are not really a rich man.” says J. Paul Getty, American industrialist


One of the key factors to measure the success of your architectural practice is the ‘Financial temperature’ of your firm. To maintain normal financial temperature of the firm, it is important to have basic insights of finances so that firm can manage to accomplish its goals. 
The financial health of your company is based on 5 basic accounts types: 

 Assets
Liabilities
Equity
Income 
Expenses

Assets:

As per the sample business plan discussed in my previous blog (refer blog link), you will be investing 25000$ as capital to start your practice. You will be required to spend money for establishing the office, buying equipments, software, car, furniture etc. which we call ASSETS. 
Assets can be understood as the “possessions which are tangible or intangible in nature which can be encashed.”

Liabilities: 

Liability is the sum of money you owe to others, like car loan, borrowings from bank or relatives, etc. This is the money which you are legally required to pay back in instalments or as per agreed terms and conditions.

Equity: 

Equity is the value of the firm’s assets, generally called ‘Net Worth’. 
Equity = assets – liabilities. 
Higher the equity - healthier the firm.

Income: 

Income is also called Revenue. Gross income is generated from project fees, any other joint venture, interest, dividend, royalties etc.
Net income is profits remaining after expenses have been deducted from gross income. Income always increases your equity. More the income betters the financial health.

Expenses:
Expense is the payment towards the services or goods purchased from others. 
Expenses are two types
1: Direct Expenses which can be directly related to your project, e.g. payments towards staff salary, consultant, conveyance etc. 
2: Indirect expenses are of a general administrative nature which cannot be directly related to specific project e.g. marketing, taxes, office supplies etc. 
Expenses always decrease your equity. More the expenses weaker the financial health. 

Profit /loss:  

Profit is defined as Revenues – Expenses.
When the above values results in minus, it is a loss. Profit and loss is to be computed under certain standard rules laid down by the direct tax act.

The financial health of the firm is presented in your balance sheet. Balance sheet account covers assets, liabilities and equity, which reflect the value of how much you own and owe. Income and expense account, also called profit and loss account reflects changes in value of how much you own or owe in particular date or period. 

To view the Glossary of various Financial terms: Click on Glossary here






Funny Fact from a Professor of Finance

A professor of finance is walking on the campus with his Research Assistant.
Research Assistant: Professor, I see a $20 bill on the sidewalk. Should I pick it up?
Professor: No, of course not, if it was really there, it would already have been picked up.

Don’t you wish to keep your firm financially healthy, happy and wealthy?
It’s time to say ‘yes 2 Architectural Management’ !


Interesting watch: http://www.youtube.com/watch?v=1qZZupwTrpU&feature=related


Further Reading: The AIA handbook of professional practice ;                       http://www.gnucash.org/docs/v1.8/C/gnucash-guide/accts_concepts1.html


Next Blog: Recommended accounting concepts for Architects

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