PROFIT:
A SMALL MARGIN FOR ERROR
AIA Pittsburgh
LEAD BY DESIGN, BUILD PITTSBURGH 2014
Stephen M cCarron
Assistant Vice Pre...
Credit(s) earned on completion
of this course will be reported to
AIA CES for AIA members.
Certificates of Completion for
...
This presentation is protected by US and International Copyright laws.
Reproduction, distribution, display and use of the ...
Businesses that are not profitable fail. In the
professional design industry, open discussion
of fees, profit, and associa...
Learning
Objectives
1. Understand the Sherman Antitrust Act.
2. Learn how to calculate your firm’s Critical Numbers.
3. Id...
The Sherman Anti-Trust Act
• The Sherman Anti-Trust Act 1890 (prim ary author Sen. John Sherman, R-
OH) was intended to pr...
A Three-Part Law
I. SECTION 1. Delineates and prohibits specific m eans of anti-competitive
conduct.
II. SECTION 2. Incorp...
Principles of Practice,
American Institute of Architects 1909
• The membership is growing.
• Fee schedule establishes base...
1971 and 1990 Consent Decrees
Neither the Institute (AIA) nor any com ponent is perm itted to have a
mandatory fee schedul...
The Good, the Bad, and W hat we
are NOT going to Discuss
GOOD: Professionals are in no way restrained, directly or indirec...
The Firm,
Composition and Organization
FIRM SIZE
• The statistical average, as recorded by the AIA for architecture firms ...
WHO IS YOUR NUMBERS
GURU?
The Tools
PROFESSIONAL SERVICES ERP
• Enterprise resource planning ( ERP) is a business m anagement software—
usually a su...
Critical Numbers
CPA
BANKER
FINANCIAL ADVISOR
FAM ILY FRIEND
MANAGING
VS.
UNDERSTANDING
Does your numbers guru author
your...
Definitions
• REVENUES / GROSS PROFIT M ARGIN
• PROFIT and LOSS STATEM ENT / BALANCE SHEET
• DEBT SERVICE CALCULATION / CA...
Income Statement
•Net Profit
•Gross Profit
(Cost of Goods Sold)
•Operating Profit
•Net Income
SAMPLE
Balance Sheet
SAMPLE
•Current Ratio
•Accounts Receivable
•Current vs.
Long-Term Debt
•Retained Earnings
•Debt to Equity Ra...
Debt to Equity Ratio (Leverage)
More debt and higher leverage results in a sm aller overall margin for error;
Less debt ca...
Numbers in Summ ation
W HY STUDY YOUR BALANCE SHEET?
Managing payables and receivables allows a firm to manage cash
better...
Financial Analysis
SAM PLE
Cash Flow Coverage Ratio
Net Income
+ Interest
+Depreciation/Amortization
-Distributions
=Cash Flow Available for Debt Ser...
Factors at W ork
W ho understands and applies the numbers?
Critical numbers impact and advise as to staff management and p...
This concludes The American Institute of Architects
Continuing Education Systems Course
AIA Pittsburgh
The Bruno Building
...
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First Federal Savings Bank at AIA Build Pittsburgh 2014 “Profit: A Small Margin for Error” from AIAPittsburgh

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Presenter: Stephen McCarron,First Federal Savings Bank.

Businesses that aren’t profitable fail. In the professional design industry, open discussion of fees, profit, and associated margins is discouraged by general counsel and practically taboo. But in a climate where margins must be competitive, it is necessary to understand the law that governs them, the methods and technologies available to calculate them, and the factors that influence them.

Gain a better understanding of the Sherman Antitrust Act and the shifting legal climate of fee structures. Learn how to calculate your firm’s critical numbers, identify trends that impact profit margins, and explore the technologies available to assist professionals in profit tracking.

Published in: Business, Economy & Finance
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First Federal Savings Bank at AIA Build Pittsburgh 2014 “Profit: A Small Margin for Error” from AIAPittsburgh

  1. 1. PROFIT: A SMALL MARGIN FOR ERROR AIA Pittsburgh LEAD BY DESIGN, BUILD PITTSBURGH 2014 Stephen M cCarron Assistant Vice President M arket M anager First Federal Savings Bank
  2. 2. Credit(s) earned on completion of this course will be reported to AIA CES for AIA members. Certificates of Completion for both AIA members and non-AIA members are available upon request. This course is registered with AIA CES for continuing professional education. As such, it does not include content that may be deemed or construed to be an approval or endorsement by the AIA of any material of construction or any method or manner of 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.
  3. 3. This presentation is protected by US and International Copyright laws. Reproduction, distribution, display and use of the presentation without written permission of the speaker is prohibited. © First Federal Savings Bank 2014 Copyright Materials
  4. 4. Businesses that are not profitable fail. In the professional design industry, open discussion of fees, profit, and associated margins is discouraged by general counsel and practically taboo. But in a climate where m argins m ust be com petitive, it is necessary to understand the law that governs them, the m ethods and technologies available to calculate them , and the factors that influence them . Course Description
  5. 5. Learning Objectives 1. Understand the Sherman Antitrust Act. 2. Learn how to calculate your firm’s Critical Numbers. 3. Identify Trends that impact profit margins. 4. Explore Technologies available to assist professionals in profit tracking.
  6. 6. The Sherman Anti-Trust Act • The Sherman Anti-Trust Act 1890 (prim ary author Sen. John Sherman, R- OH) was intended to prohibit business activities deem ed “non-competitive”. • The Act passed in direct response to the onset of “m onopolies” and “cartels” as the United States entered its Gilded Age. • The Act has been interpreted to protect the concept of “competition”, not competitors or consumers. • The constitutional basis for the Act is the Federal Government’s authority to regulate interstate commerce. • Subsequent Acts include the Clayton Anti-Trust Act (1914) and the Robinson-Patman Act (1936).
  7. 7. A Three-Part Law I. SECTION 1. Delineates and prohibits specific m eans of anti-competitive conduct. II. SECTION 2. Incorporates end results that are anti-competitive in nature. For instance, an entity m ay act within the technical letter of the law, but still violate its intention. III. SECTION 3. Extends the provisions of Sections 1 and 2 to U.S. Territories and the District of Colum bia. A violation of the law may be of a “Per se” or “Rule of Reason” type.
  8. 8. Principles of Practice, American Institute of Architects 1909 • The membership is growing. • Fee schedule establishes base, m inim um rate of 6% . • Gratuitous work, advertising, and undercutting are “to be condem ned”. • Just basic services and a regular coffee, please!
  9. 9. 1971 and 1990 Consent Decrees Neither the Institute (AIA) nor any com ponent is perm itted to have a mandatory fee schedule or recom m ended fee guidelines that members are expected to follow. Professional fee schedules have been held to be unlawful price fixing. W hen asked about fees that architects customarily charge, a component should respond that fees are a m atter for negotiation between client and architect. However, it is appropriate for components to distribute information about types of fee arrangem ents, lump sum, percentage of construction cost, hourly rates . . . Discussion of fees at chapter meetings should not be allowed. M em bers should make their own independent decisions on what to charge for their services. Preamble
  10. 10. The Good, the Bad, and W hat we are NOT going to Discuss GOOD: Professionals are in no way restrained, directly or indirectly, as to their professional fees. BAD: An industry wide pressure to lower fees is deem ed as the success of the Anti-Trust Act in the court system . TABOO: 1. Competitors gathering. (An “agreem ent”.) 2. Fixing prices. (Lim iting “com petition”.) 3. Conspiring to fix prices. (Im pacting “interstate commerce”.)
  11. 11. The Firm, Composition and Organization FIRM SIZE • The statistical average, as recorded by the AIA for architecture firms is 9-10 persons. FIRM COMPOSITION • Registered professionals. • Non-licenses graduates. • Technical staff, design and non-design oriented. • Business administration. PRACTICE TYPE • General practice. • Specialty firm - specialty projects and services. • Multi-discipline.
  12. 12. WHO IS YOUR NUMBERS GURU?
  13. 13. The Tools PROFESSIONAL SERVICES ERP • Enterprise resource planning ( ERP) is a business m anagement software— usually a suite of integrated applications— that a com pany can use to store and manage data from every stage of business, including: Project planning, cost and developm ent, services, m arketing and sales. • Axium • Deltek • BillQuick • Sage • Microsoft Dynamics • Clearview • NetSuite
  14. 14. Critical Numbers CPA BANKER FINANCIAL ADVISOR FAM ILY FRIEND MANAGING VS. UNDERSTANDING Does your numbers guru author your firm ’s proposals?
  15. 15. Definitions • REVENUES / GROSS PROFIT M ARGIN • PROFIT and LOSS STATEM ENT / BALANCE SHEET • DEBT SERVICE CALCULATION / CASH FLOW COVERAGE RATIO • RETAINED EARNINGS • DEBT TO EQUITY RATIO (LEVERAGE)
  16. 16. Income Statement •Net Profit •Gross Profit (Cost of Goods Sold) •Operating Profit •Net Income SAMPLE
  17. 17. Balance Sheet SAMPLE •Current Ratio •Accounts Receivable •Current vs. Long-Term Debt •Retained Earnings •Debt to Equity Ratio (Leverage)
  18. 18. Debt to Equity Ratio (Leverage) More debt and higher leverage results in a sm aller overall margin for error; Less debt can accommodate slowdowns in work and sm aller profit margins. Understanding the balance sheet and debt calculation allows for the generation of competitive proposals which are still profitable.
  19. 19. Numbers in Summ ation W HY STUDY YOUR BALANCE SHEET? Managing payables and receivables allows a firm to manage cash better. Payables and receivables are the key indicator of the firms “Cash Cycle”. Long term and short term debt can allow you to forecast yearly totals. •
  20. 20. Financial Analysis SAM PLE
  21. 21. Cash Flow Coverage Ratio Net Income + Interest +Depreciation/Amortization -Distributions =Cash Flow Available for Debt Service (CFADS) All M onthly Debt Paym ents X 12 = Annual Debt Service (ADS) CFADS / ADS = Cash Flow Coverage Ratio (Debt Service Coverage)
  22. 22. Factors at W ork W ho understands and applies the numbers? Critical numbers impact and advise as to staff management and proposal generation. W ho manages your firm’s numbers? It is the role of an Accountant to crunch numbers, not necessary advise. Do you have the tools to track the numbers? Software should be usable, with the appropriate level of job and accounting interface.
  23. 23. This concludes The American Institute of Architects Continuing Education Systems Course AIA Pittsburgh The Bruno Building 945 Liberty Ave. Unit 3 Pittsburgh, PA 15222
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