Practice Management - Financial Management Flashcards

Question

Balance sheet: | what is it? what is its core formula? what 4 key financial indicators does it provide?

Answer 1

An accounting report or statement that summarizes all assets and liabilities and shows the current financial position of the business. - all listed assets must equal listed liabilities, aka: (total assets) = (total liabilities) + (net worth or owner's equity) Includes these 4 key financial indicators to calculate from each month's financial report: 1. Solvency or Current ratio: Measures a firms ability to pay current debt. Formula: total current assets / total current liabilities Target ratio: min 1.5 to 1.0 2. Liquidity or Quick ratio: Measures a firm's ability to convert assets to cash. Formula: (cash + accounts receivable + revenue earned, but not billed) / total current liabilities Target ratio: min 1.0 to 1.0 3. Leverage or Debt-to-Equity ratio: Measures a firm's ability to manage debt effectively as a %. Formula: total liabilities / total equity x 100 (as a percentage) Target: < 35% or <2 4. Return on equity: Measures the accumulated amount of money returned on a stockholder's investment for their risk and efforts. Formula: (total net operating revenue -- total expenses) / total equity x 100 (as a %) Target: = or > than the anticipated net profit in the annual profit plan, typically 20% or greater

Answer 2

(total assets) = (total liabilities) + (net worth or owner's equity) The net worth of the business or owner's equity is very important to balance sheets since total assets must equal the total liabilities plus the net worth or owner's equity.

Answer 3

Total assets less the total liabilities (aka mathematical structure of balance sheets) aka what is owned minus what is owed

Answer 4

Money invested in the business by owner's or stockholders.

Answer 5

An accounting report or statement that lists all the income and expenses of a business for a certain period of time. - The difference between all income and all expenses yields either a profit or loss for that period - reflects the results of a firm's operations in terms of its revenue, direct labor, indirect labor, indirect expenses, and net profit for a given accounting period (typ current month and year to date) Includes these 7 key financial indicators to calculate from each month's financial report: - Utilization rate - Overhead ratio - Break-even rate - Net multiplier - Profit-to-earnings ratio - Net revenue per employee - Aged accounts receivable

Answer 6

An accounting report or statement that shows actual inflows and outflows of cash or cash equivalents. It is important because a business's month-to-month financial health depends on being able to meet payroll and pay bills.

Answer 7

money, checks, or anything else accepted by banks

Answer 8

short-term investments that can be quickly converted into cash - ex. short-term certificates of depot

Answer 9

Beyond basic bookkeeping and accounting activities. | - Includes active planning, monitoring, and controlling of financial information AND acting on that information

Answer 10

profit + expense = revenue (organizing the formula like this suggests that the business will make its targeted profit and the business must then control expenses and generate the appropriate revenue) revenue - expenses = profits (organizing the formula like this suggests that profit is whatever may be left over after expenses are subtracted from revenue)

Answer 11

Reduce overhead cost wherever possible.

Answer 12

1. Increase how much work the firm does or 2. Increase fees

Answer 13

A report helpful to an architecture firm other than basic accounting reports. A detailed, computer-generated version of the manually produced charts for a single project. It shows: - hours and labor costs for each phase of a project, both current reporting period and total to date, and compares them with estimated hours and costs - direct costs (ie for consultants, overhead allocations, and reimbursable expenses) It gives project manager and firm management accurate state of a project and can be used to take corrective action as necessary

Answer 14

A report helpful to an architecture firm other than basic accounting reports. It summarizes each of the firm's projects in terms of: - amount of revenue generated - expenses occurred - unmilled services - percentages of completion - profit to date It can help firm management find any projects that may be hurting overall profitability and need remedial action.

Answer 15

A report helpful to an architecture firm other than basic accounting reports. Shows statuses of invoices for all projects whether or not they have been paid.

Answer 16

The time from invoice date to payment or current date if unpaid. - unpaid invoices > 60 days old need attention from principal or collections - average collection period for invoices = 60<75 days - an invoice older than 90 days = firm is effectively lending money to the client without charging interest

Answer 17

A report helpful to an architecture firm other than basic accounting reports. Lists each employee along with the number of hours they have spent on direct labor, indirect labor, vacation time, sick leave, and holidays. It helps managers calculate the chargeable ratio (or utilization rate) of employees

Answer 18

formula: (% of time (or dollars) spent on direct labor) / (total time (or dollars) spent on direct labor, indirect labor, vacation time, sick leave, holiday) AHHP: Direct labor expressed as a percentage of total labor. For individual rates, use hours; for a firm rate, use dollars.

Answer 19

75%-85% below 75% due to time spent managing the firm

Answer 20

= (total current assets) / (total current liabilities aka debts) - Measures a firm's ability to meet current obligations or pay current debt - The higher the ratio the better - 1.5 = healthy business - 1.0 = min acceptable

Answer 21

NP = NOR -- (total direct and indirect labor + total indirect expenses) *calculated before any distributions are made or tax is paid. Also called net income. NPBT ratio = net profit / NOR - one of the most important metrics of a company's performance - since it does not include tax, it reduced one variable which could influence final financial data results Current earnings: The net dollar amount after all distributions are made and all applicable taxes have been deducted.

Answer 22

= (total office overhead aka total indirect expenses) / (total direct labor) direct labor = (hourly salary of employee) * (chargeable hours worked in a time period) 1.3-1.5 It tells you how the amount you need to spend on your cost of business per $1 you spend on salary while someone is working on a project in order to keep your business running. Aka rent, taxes, software, salary when people are not working on projects are all 1.3-1.5 times the amount that you are paying people to do billable work, and you can't directly bill this to a client. However, you have to get that money coming in. That's where the break-even rate comes in. Break even rate = Overhead rate + 1 How much you need to make to break-even on your expenses. You need to add a markup (ex. 20%) in order to make a profit. Markup = however much you add to the break-even rate in order to make a profit Profit Margin is a ratio that tells you how much money you are making: profit margin = (Total cost you have charged -- Break-even cost)/Total cost = xx% -- percentage!

Answer 23

refinement of the current ratio, measures a firm's ability to convert assets into cash = (only cash and cash equivalents + accounts receivable + revenue earned but not billed) / total current liabilities Ideally > 1 It shows the company's capacity to pay its current liabilities without needing to sell its inventory or get additional financing.

Answer 24

= (amount of net revenue) / (# of technical staff members) - can be used to estimate required net operating revenue for future budgets - If firm's operating revenue is known, revenue per technical staff can be used to estimate staffing levels.

Answer 25

= (annual net operating revenue) / (total # of employees) / year - can be used to estimate required net operating revenue for future budgets - if firm's operating revenue is known, revenue per employee can be used to estimate staff levels

Answer 26

AHPP: Project-related expenses that are invoiced to the client in addition to fee. These would also include markup percentage on those expenses. The markup dollars are a form of revenue and are included in net operating revenue. Ballast: Costs and charges incurred by the architect that directly attribute to a project - ex. mileage, food during travel, plotting/printing, courier services, etc - does not include architect's normal overhead

Answer 27

Charging a billing rate, aka hourly rate per staff member working on a project

Answer 28

Hourly rate per staff member working on a project. Determined based on: (employee's salary) + (cost of that employee's fringe benefits) + (cost of office overhead) + (allowance for profit) Calculations are often simplified by a net multiplier

Answer 29

Benefits generally not included in an employee's taxable income - ex. health insurance, retirement plan contributions, childcare assistance, fitness access, etc

Answer 30

It is the measure of return on every dollar of direct labor, and often used to simplify billing rate calculations. = (NOR, excluding consultant's fees and reimbursable fees) / (total direct labor) "total direct labor" = the cost of labor that is directly chargeable to projects, including: - employee base salary - fringe benefits - indirect labor - overhead - profit So, the net multiplier accounts for how much you pay your employee, how much overhead is spent on that employee, and whatever is leftover for profit. Recommended rate = 2.7 < 3.0

Answer 31

The overhead rate plus he unit cost of 1.00 for an hour of salary. = overhead rate + 1 or = (total cost of operations) / (total money spent on direct labor) - recommend rate = 2.30 < 2.50 - multiply it by the employee's base hourly salary to get the minimum hourly fee that must be charged to client in order to break-even on employee's salary - similar to net multiplier - can be used to simplify billing rate calculations - break-even rate accounts for salary of the employee and amount of overhead attributed to employee

Answer 32

(employee's base salary) x (break-even rate) Increase min hourly fee by whatever percentage of profit is wanted to arrive at hourly fee

Answer 33

= (direct personnel expense) / (net revenue, excluding consultant's fees and reimbursable expenses) - costs of providing taxes, benefits, etc are included with the employee's salary - multiplier is then calculated to account for indirect labor and profit - multiplier is slightly lower than net multiplier since benefits are already included in DPE, so it is not as commonly used as net multiplier

Answer 34

A right to keep possession of property belonging to another person until a debt owed by that person is discharged. Consider filing a lien against a client's project in the face of nonpayment over 90-120 days. An attorney should be consulted to comply with state laws.

Answer 35

1. Contract Terms 2. Timely billing 3. Complete invoices 4. Regular procedures for tracking accounts

Answer 36

It's important have a clear understanding with the client before work starts about fee and how it will be paid Contract should include: - basis for fee - when invoices will be sent and in what form - when payment is due - penalties for late payment (ie. interest charges after 45 days) - provisions for nonpayment = stopping work on a project until work has been received (use attorney for language)

Answer 37

- Delays in billing = delays in payments - Faster billing helps clients to associate invoice with work performed during the billing cycle and may forestall questions. 1. Send invoices as soon after the pay period as possible 2. Bill twice a month min, once a month max 3. Avoid agreeing to a lump sum payment at the end of phase completion, which can delay cash flow for months

Answer 38

- Be easy to read and understand so as to avoid questions and delayed payment - Name and address of the client - Project name and number - Reference to a contract - Detailed breakdown of work performed and billing associated with each item, - Reimbursable expenses with backup documentation - Name/number of person to contact with any questions - Consistent format

Answer 39

1. Breakdown of time each member spent on the job, their billing rates, and total cost 2. Itemization of each phase of work or work task that was outlined in the contract

Answer 40

- Maintain a company policy on how to handle accounts receivable - Follow up on an invoice if payment not received after 2 weeks - Additional actions in accordance with contract taken after 30 days - Keep a written record of all the office's actions regarding collections - At beginning of project, verify client's billing procedures and be familiar with them (ie who to send invoices to, specific format or information, etc) - Use personal approach to collect fees - Use software that develops aged accounts receivable, and deal with oldest accounts first - Plan for cash flow (cash flow reports) - Consider offering a 1-2% discount for payments made within a short time frame (ie 1-2 weeks) - Require 10-20% retainer before work starts (if client objects, red flag for financial solvency) - Beware of delaying tricks -- as long as a firm has fulfilled its contractual obligations do not be dissuaded from aggressively seeking payment - Be prepared to file a lien against a client's project, consults a lawyer for state law

Answer 41

Provisions that allow for renegotiation of terms, billing rates, and other financial considerations that may change with time.

Answer 42

Keeping it to a minimum will increase the firm's profits or allow a firm to offer lower fees than the competition.

Answer 43

Non-billable labor - high priority to minimize - important to carefully control time reporting Report all significant non-labor direct expenses (aka chargeable expenses often thought of as overhead): - progress prints - copy machine use - computer expenses charged by outside company - model supplies - postage/delivery - local travel expense - presentation supplies - Firm office location/rent - Best princes on phone service, internet, etc - Firm's insurance policies (ex. health and project) - Team up with other firms on to shareholders costs of continuing education / share info

Answer 44

Time analysis report

Answer 45

Office earnings report

Answer 46

Project progress report

Answer 47

Part of a Profit and Loss statement. Measures the firm's effectiveness in generating a net profit (as a %). Formula: net profit (before distributions and tax) / net operating revenue Target: = or > 20%, or the anticipated net profit in the annual profit plan

Answer 48

1. Net operating revenue (dollars available for supporting daily operations and the baseline 100% value of the rest of every line item in the report) 2. Total direct labor, as a percentage of NOR. 3. Total expenses 4. Net profit (before distributions and tax and referred to as the "bottom line"

Answer 49

net profit

Answer 50

1. Current assets: Those easily converted to real dollars 2. Current liabilities: Items that must be paid within the current 12-month period, irrespective of the calendar year, that diminish the value of a firm's retained earnings and thereby reduce equity. 3. Long-term liabilities: Items that must be paid beyond the current 12-month period and diminish the impact of the value of a firm's retained earnings (and thereby reduce equity) 4. Equity: The value of shares of stock, invested capital by shareholders, and the firm's cumulative retained earnings (or loss) * note: current assets (cash-on-hand, accounts receivable, and fees earned unbilled) are line items that need careful, regular scrutiny to ensure that the firms maintaining a proper margin over its liabilities.

Answer 51

- bad debt - current earnings - accrued bonus - accumulated depreciation/amortization

Answer 52

a debt owed to the firm that is uncollectible (ex. invoiced amounts on aged accounts receivable that can be written off due to clients' failure to pay)

Answer 53

available cash

Answer 54

net profit

Answer 55

cash-basis profit-loss statement and accrual-basis profit-loss statement

Answer 56

- Can be calculated from P-L statement - Measures the average time interval in days between the date of outstanding invoices and the date payment is received. Formula: average annual accounts receivable ÷ (net operating revenue ÷ 365 days) = calendar days before payment is received - Example: $245,090 ÷ ($622,207 ÷ 365 = 1,705) = 144 calendar days - Target: 60–90 calendar days (Anything over 90 days means the firm is ”lending” money to client at zero cost.)

Answer 57

A type of budget where the agreed-upon fee for services is set first (at the top of a balance sheet) and the work effort is derived from it (working downward). Usually the basis of a fixed fee proposal.

Answer 58

A type of cost proposal where the architect invoices the owner for all costs of basic services incurred on the project, up to a predetermined fixed limit that will not be exceeded. Generally, the most fair for both parties; gives the owner predictability for budgeting and the architect some flexibility in fee.

Answer 59

A type of cost proposal where the architect invoices the owner directly for all costs of basic services incurred on the project (assessed hourly) with no fixed limit. The owner is not able to completely predict the cost of service.

Answer 60

A type of cost proposal where the fees for the architect’s services are predetermined, giving the owner more predictability in the soft costs of the project. The architect typically is more at risk in this scenario, as it is difficult to accurately predict the amount of effort that may be required over the life of a project.

Answer 61

A type of budget where the work effort is estimated first (usually at the bottom of a balance sheet) and then the total fee required to perform the work is determined from it (working up toward the top of the sheet).

Answer 62

Expenses incurred in conducting normal business operations. Operating expenses may include wages, salaries, and administrative and marketing/business development costs, but excludes interest, depreciation, and taxes.

Answer 63

A term used to describe the relationship between the generation of an invoice and the time expected to pay that invoice. Usually 30 days. Unpaid invoices beyond this limit are referred to as aged invoices.

Answer 64

The total assets a company or firm carries on a balance sheet. Also used to describe the net worth of an owner’s equity accounts, including real estate, cash, and other accumulated wealth.

Answer 65

A value of anticipated revenue based on contracted projects that still have portions of work yet to be performed. Backlog increases for every project commission secured.

Answer 66

The ending of a mechanic’s lien, it is the document stating the contracted worker or provider of materials or services releases the responsible party from obligation, after the party has satisfied the terms and requirements of the lien.

Answer 67

The document by which someone holding a mechanic’s lien against another waives his right to the claim.

Answer 68

The transfer of an amount previously regarded as an asset (e.g., an account receivable) to an expense account or to the profit-and-loss account.