“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.
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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