Financial and Risk Management Flashcards
What are the types of Financial Management?
Basic Accounting (General Ledger) Project Cost Accounting
Describe Basic Accounting.
Applicable to all business
Keeps track of money flowing
Provide overall financial status of the firm
Fundamental for decisions with profitability and survival
Describe Project Cost Accounting.
Tracks revenue, expenses and profit by projects
Evaluate time spent and how it affects the health of the company
Helps to decide how to allocate resources, manage projects and develop accurate proposals
What is Accounts Payable?
Amount owed not yet paid (goods/sevices)
What is Accounts Receivable?
Money owed by others (invoices/services)
What are Tangible Assets?
Cash, inventory, machinery that can be measured in monetary terms
What are Intangible Assets?
Patents, Copyrights, Trademarks that can be measured in monetary terms
What are Current Assets?
Resources that can be converted into cash in one year
What are Fixed Assets?
Resources that are retained for a long period of time
What is a Chart of Accounts?
List of various accounts and its number to keep track of money
What is included in the Direct Personnel Expenses?
Employee salaries plus mandatory and discretionary expenses
List Mandatory Expenses
Taxes and Health Insurance
List Discretionary Expenses
Meals, Party, etc
What is Direct Labor?
All labor that is direct chargeable to a project (technical staff, principal and support staff)
What is Indirect Labor?
All labor not charged to a specific project (administrative, office and marketing personnel)
What is Discretionary Distribution?
Voluntary distribution of profits to owners and non-owners
What is included in the Discretionary Distribution/
Performance bonuses
Profit sharing
Incentive compensation
What is Liability?
Claims against the business
What is Gross Revenue?
All revenue generated during a stated period of time
What is Net Revenue?
Money that remains after all expenses are paid (revenue minus expenses)
What is Overhead?
Fixed expenses (rent, leases, electricity, telephone services, etc)
What can be included in Other Assets?
Securities and Copyrights
What are the accounting methods?
Cash Accounting
Accrual Accounting
Describe Cash Accounting
Revenue and expenses are processed when received/paid the money
Main advantages of Cash Accounting?
Better to track actual cash flow
Very simple and usually used by a single-person business
Grouped in individual accounts for auditing purpose, review, tax preparation, management and analysis
Describe Accrual Accounting
Revenue and expenses are processed at the time you receive/send an invoice (money not received yet)
Main advantages of Accrual Accounting?
Gives a better picture of a business long-term financial status
Grouped in individual accounts for auditing purpose, review, tax preparation, management and analysis
Uses double-entry bookkeeping and posted to a ledger where transactions are grouped into individual accounts
What is Double-entry Bookkeeping?
All transactions chronologically listed in a journal
What is the typically accounting method used by Architectural firms?
Modified Accrual Basis
Describe Modified Accrual Basis method
Firm records fee revenues, expenses billed to the client, and invoices from outside consultants
What is an Accounting Statement?
Reports from information entered in journals and ledgers
What is a Ledger?
A book or other collection of financial accounts of a particular type
What are the main Accounting Statements?
Balance Sheets Statements
Profit and Loss Statements
Cash Flow Statement
Describe Balance Sheets Statement
Summarizes all Assets and Liabilities
Shows financial position of the business
Reflect the Net Worth and owner’s equity
Only statement for a single point in time (snapshot)
What is Net Worthy?
Total Assets minus Total liabilities
What is Owner’s Equity?
Money invested by stockholders
What is the summary of a Balance Sheet?
Total Assets = Total Liability + Net Worth
Describe Profit and Loss Statement
Lists all the income and expenses during a certain period of time
It reflects the profit or loss for that period
Describe Cash Flow Statement
Shows actual inflows and outflows of cash
Measures the month-to-month health of the business
What is the fundamental equation for a Profit Planning and Financial Management?
Profit = Revenue - Expenses
Main actions to make a firm profitable?
Control of expenses
Reducing Overhead costs
Use of softwares to control work performance of the projects
Main actions to increase revenue?
Increase amount of work and fees
List financial reports that an Architectural firm can use
Project Progress
Office Earnings
Aged Accounts Receivables
Time Analyses
What is part of a Progress Report?
Hours and labor cost for each phase of the project
(reflects current period and total to date in comparison to what was estimated)
Shows direct costs (consultants, overhead allocation, and reimbursable expenses)
What is the main purpose of a Project Progress report?
Give the PM and firm management a accurate look at the status of the project and if necessary actions are necessary or not
What is an Office Earnings Report?
Summary of each project in terms of the amount of revenue it generates, expenses it has incurred, unbilled services, percentage of completion, and profit or loss to date
Helps to control whether project are being profitable or not
What is part of an Aged Accounts Receivable Report?
Show the status of invoices for all projects, whether or not they being paid
Show the age of the invoice (date issue/payment date)
What is the average time frame to collect an invoice?
60 days (more than that needs special attention)
What happen if a firm has unpaid invoices for more than 90 days?
Firm is loosing money because it is not charging interest
What is a Time Analyses Report?
Report that lists hours spent on direct labor, indirect labor, vacation time, sick leave, and holiday for each employee
Generates the Chargeable Ratio or Utilization Rate of each employee
What is a Chargeable Ratio?
Direct labor time / Total time
What is the minimum Chargeable Ratio for a firm to break-even?
60 to 65% (average all employees)
75 to 85% (average design team)
Principal can be a little lower since they spend most of the time devoted to non-chargeable work
What is a Financial Ratio or Performance Indicator?
Method to measure the financial health of the firm and whether corrective actions are needed
What are the Key Financial performance indicators
Utilization Ratio Overhead Rate Break-even Rate Net Multiplier Aged Accounts Receivable Profit Earning Ratio Net Revenue per Employee
What is the formula for Utilization Rate, average target percentage and what it measures?
Formula: Billable hours / Total hours
Target: 60 to 65% (staff employees) / 75 to 85% (design team)
Measures efficiency and effectiveness of labor
What is the formula for Overhead Rate, average target percentage and what it measures?
Formula: Direct expenses / Indirect expenses
Target: 1.5 to 1.75% of direct labor
Measures: Cost of business not attributed direct to projects
What is the formula for Break-even Rate, average target percentage and what it measures?
Formula: (Employee hour x Overhead Rate) + Employee hour
Target: 2.5 to 2.75 of direct labor
Measures: Cost for doing business for every dollar spent on direct labor
What is the formula for Net Multiplier, average target percentage and what it measures?
Formula: Net Operational Revenue (operating expenses - revenue) / direct labor
Target: 2.75 to 3.25 or higher
Measures: Revenue for every dollar spent on direct labor
What is the formula for Aged Accounts Receivable, average target percentage and what it measures?
Formula: Annual Average Acc. Recvb. / Net Operating Revenue (NOR) x 365 days
Target: 45 days
Measures: Average interval between invoice date and payment
What is the formula for Profit Earning Ratio, average target percentage and what it measures?
Formula: Profit before distribution-taxes / NOR
Target: Equal or greater than what was planned to the year
Measures: Complete project with profit
What is the formula for Net Revenue Per Employee, average target percentage and what it measures?
Formula: NOR / # Employee
Target: As high as possible
Measures: Revenue per employee
What is the Revenue Per Employee used for?
To establish realistic Net Operating Revenue for the next year budget
What is the formula for Current Ratio, average target percentage and what it measures?
Formula: Total current assets / total current liabilities
Target: More than 1.5 (minimum 1.0)
Measures: Firm’s ability to meet current obligations
What is Net Profit?
Percentage of profit based on net revenue
Formula: Total annual revenue - expenses
What is a Liquidity Ratio?
Ability of a company to pay its short term financial obligations as they become due typically within one year.
What is included in a Liquidity Ratio?
Current Ratio
Quick Ratio
What is Quick Ratio
Liquid Assets (Current Assets - Inventory - Pre-paid expenses) / Current Liabilities
Is inventory considered Liquid Asset?
No, because if inventory needs to quick become cash, company needs to sell with discount
What is considered Liquid Assets?
Cash
Cash Equivalents
Accounts Receivable
Marketable Securities
What is the most common method to set service fees?
Charge an hourly rate per staff member working on project Past projects (construction cost, project type, square footage)
How Billing Rates are determined?
Employee salary + fringe benefits + office overhead + allowance for profit
What are the basic steps for a good Managing Account Receivable?
Contract Terms
Submit Invoice Promptly
Make sure invoices are complete
Regular Procedures to track accounts
What should be included in a contract to cover collecting service fee?
Itemized terms
Basis of fee
When and in what form invoices will be sent
When payment is due
Penalties for late payments
Interest rate for payments after certain amount of days
Provisions for nonpayment, including stopping work and no presentation until payment is received
Attorney should be consulted
What should be the ideal billing cycle for the payments?
Every month
If Reimbursable expenses are part of the invoice, what should be included?
Appropriate documentation and past due amount
Main procedures for Tracking accounts?
Send past-due notice after 30 days
Make personal calls
Keep written record regarding collection
Old accounts should be priority for collection
If payment policy is not fully stated in the contract, what the firm can to have it covered?
Provide a Standard Policy Statement at the start of the project
What are the benefits to controlling overhead?
Increase the firm’s profit
Allow the firm to offer lower fees than competition
What are the ways to minimize heavy overhead expenses?
Minimize non-billable labor (marketing, general coordination, admin)
Control non-labor direct expenses, such as prints, computer charges outside company, supplies, postage, delivery, and local travel
What are the ways to minimize light overhead expenses?
Shop for phone, internet, and communication services
Reevaluate office’s location and space used
Team up with other firm’s to continuing education
Revise insurance policies
What can Legal Issues involve?
Contracts Firm's Structure Human Relations Financial Management Insurance Professional Conduct Copyright Expert Witness Involvement Obligations to the Public
What is Agency?
Legal concept of one person (agent) acting on behalf of another (the principal) in dealing with another (third party)
What are the main responsibilities of an agent?
Create a legal relationship between Principal and Third party
Keep principal (owner) informed about actions, progress and issues of the project
Convey requests from owner to contractor
What should the Standard Agreement forms and General Conditions of a contract aim to minimize?
Potential problems, by clearly defining the duties and responsibilities of the parties
By law, what duty means?
What one person “owes” to another in a relationship
In Architecture, what are the ways that duty is stablished?
Terms of a contract
Legislative Enactment
Architects Conduct
What are the implied duties of an architect?
Cooperating with contractor
Not interfering with contractor’s work
Giving relevant information to contractors
Assisting the owner in coordinate work
What is Liability?
Legal responsibility for injure another person or damage to property
What is Negligence?
Failure to use due care to avoid harming another person or damaging property
What are the conditions that need to be met to proof negligence?
Legal duty established
Breach of that legal duty
Breach of duty was the cause of the damage or injure
Not meet Standard of Care
What are the ways that an architect can defend against claims?
Betterment Statute of Repose Statute of Limitation Concept of Privity Indemnification Clause
Explain Betterment
Usually applied to claims of omission.
Used to cover additional cost of a material that was specified incorrectly.
Explain Statute of Repose
It varies from state to state
Begins at completion of the project
Explain Statute of Limitation
It varies from state to state
Begins when design or construction defect is discovered
What are the four general categories of risk factors?
Contract / Negotiation
Client selection
Project team capability
Communication
What are the main risks for Negotiation and Contracts?
Unclear of Inappropriate Scope of Services
Did not formally evaluate risk
Contract not in place before work started
What are the main risks for Client selection?
Client inexperienced in design issues
History of claims / litigation
What are the main risks for Project Team capability?
Inexperienced design staff
Inexperienced on-site staff
Inexperienced PM
What are the main risks for Communication?
Lack of procedures to identify conflicts
Project issues and disputes not handled correctly
Scope of Service not explain to client
What are the strategies to Avoid Risk?
Select project type that fit firm’s experience and expertise
Work with clients who have good reputation
What are the strategies to Transfer Risk?
Contracts
Insurance
What are the strategies to Assume Risk?
Accept work within the firm’s capability
Enough money to keep insurance paid
What are the strategies to Control Risk?
Adopt best practice (maintain documentation) and consistent procedures (quality control programs)
Train employees
Hire lawyers when necessary
Avoid last-minute changes
Explain the Concept of Privity
Common law principal which one party cannot sue the other if there is no contract biding them
Explain Indemnification Clause.
Clause that holds harmless owner / architects for any damage, claims, or losses resulting from the performance of any work on the project with whom owner / architect have no contract relationship
Besides Indemnification Clause, what other actions can be taken to minimize third-party claims/
No language in the contract that expressly states or implies responsibilities to provide management, supervision, coordination, planning of construction, unless those services are provided
No directions for methods of construction
Point out obvious construction safety problems to contractor, following up in written with contractor and owner. If problem is not correct, suggest to the owner to stop construction
What are the categories that Copyrights involve?
Drawings, specifications, other pictorial or graphic representations
Building itself
Legislation that protects architects against replication of a project?
The Architectural Works Copyright Protection Act
Is The Architectural Works Copyright Protection Act applied to all buildings?
No, only for the ones erected after December 1990
What are the main points included in the copyright?
Copy or derivate work of a project cannot be made otherwise authorized by architect
Architect owns the copyright unless he/she is an employee of the building owner or assigns the rights to the owner
Architect should register the work with the US Copyright Office within three months of the “publication” (completion of the building)
What is stated on the AIA B101, Agreement between Owner and Architect about the Instrument of Service?
Architect has ownership of the Instrument of Service and retains all common law, statutory, and other reserved rights, including copyright
Can owner keep the Instrument of Service if he/she terminates the contract at his/her convenience or architect terminates due to owner’s suspension of the project?
Only if a fee is paid
What is the best time to minimize risk with client?
Marketing
What is the purpose of the Instrument of Service?
Construction Using Maintaining Altering Adding to the project
According to AIA Document B101, what type of insurance an architect should have?
Professional Liability General Liability Property Insurance Automobile Insurance Works Compensation
According to AIA Document C201, what type of insurance an owner should have?
Liability
Property
According to AIA Document C201, what type of insurance a contractor should have?
Worker’s compensation
Automobile Insurance
Contractual Liability Insurance
Damage to other properties
Personal Injury (slander, libel, false arrest
Damages of bodily injury, occupational sickness, or death of employee
Damages of bodily injury or death to people other than employee
Bodily injury or property damage arising when after the job is complete and the contractor has left the site
What is an Instrument of Service?
All intelectual property. Includes all documentation used to develop the project
Which AIA Document states the Instrument of Service?
B101, Agreement between owner and architect, section 7
What should the architect do in the case that owner gets ownership of the Instrument of Service for future use?
Architect should include Indemnification language to protect against any claim that might arise from its use
