“In the end, understanding financial management is like understanding building codes or doing a zoning and code analysis,” says BQE's Burns. “Even though you think you understand everything—for example, because you did a similar project before—it's essential that you stop and go through the entire process.”

According to the AIA publication The Architecture Student's Handbook of Professional Practice, firm financial planning can be described as a six-step process. Starting out the full analysis, an architecture firm's financial health is best considered by looking at the firm's estimated operating budget—also known as a profit plan. “Financial guideposts come from a profit plan,” according to the AIA textbook. A simple, essentials-only version of a profit plan follows, which is helpful to any small or emerging firm. The plan is based on three steps:

▶ 1. Estimating expenses. This includes the firm's salaries and benefits as well as payroll taxes. It also includes approximate office expenses but not client reimbursable expenses or consultant project fees that are passed through to the client.

▶ 2. Establishing a profit goal. This may also be described as the firm's return on investment (ROI), and is usually stated as percentage of net revenues, after expenses and before taxes. All the effort and money the firm puts into its business should return a profit. This is what one would expect if money were invested in something else, such as stocks, bonds, or real estate.

What's the return a small or emerging firm should expect? Burns recommends 20 percent, while some management consultants offer targets in the range of 15 percent to 25 percent. “Architects pour their life into these building projects, so the return should be commensurate with the effort,” says Burns. “Otherwise, they might as well take the money and invest it in the stock market.”

▶ 3. Determining the net revenue goal. The estimated expenses are added to the profit goal, which is given as a dollar figure based on projected or desired gross revenues. This totals up as the net revenue goal. It's a net figure because it omits all reimbursable expenses listed earlier. The net revenue goal has another important function in the life of an architecture firm: It represents what the firm plans to invoice clients for their architectural services rendered. In the sample profit plan shown below, the net revenue goal is $500,000.

So the net revenue goal is known: a cool half-million. Now that the firm has established its targeted net revenue at $500,000, the firm leadership needs to understand from where this revenue is derived.