If you are thinking about or planning to start your own practice, what should you be thinking about? Starting your own practice requires a clear strategy and vision to grow a sustainable business–while planning for the unexpected.
Starting a firm requires a plan on how to hire the right staff and acquire revenue-producing business. You must establish your organizational abilities and practice focus together with the necessary starting capital and clients. At the onset, it’s critical to understand the many business, legal and ethical issues that will impact your new practice. So how can an architect learn how to get started, build a strategic plan, identify and manage exposures, obstacles and opportunities and build a solvent and sustainable practice?
The first steps a new practice owner needs to handle are the professional requirements including licensing, contractual and professional obligations as well as the standard of care and delivery of services. Next steps are determining appropriate organizational structure, hiring and developing human resource practices and guidelines, and setting up a financial structure for your practice. Successful start-up practices strategically manage their operations, revenues, billing and accounts receivable, expenses and staff.
Funding your new practice
What is the difference between “working capital” and “long term working capital?” From an accounting standpoint, working capital equals your currents assets less your current liabilities. Current assets are short term in nature and can be quickly converted to cash. Working capital would primarily be accounts receivable. “Long term working capital” is essentially the equity investment in the business. If a practice is unable to support ongoing expenses for business development and salaries, then it is under-capitalized and in need of long-term capital or equity that will sustain the business for 12-18 months while accounts are acquired and working capital is generated sufficiently to sustain the business.
The AIA Trust published an article in AIA Architect and held a seminar with useful tips on starting a practice–see “For More Information” below with links to those resources.
Is your practice covered?
In addition to all that’s been mentioned, understanding how to mitigate your new practice’s risks is critical to the success and long-term sustainability of your new practice.
A design professional practice encounters many risks that can result in financial losses to numerous people. Insurance transfers those risks to an insurance company in return for a premium payment. There are a number of important types of architecture practice insurance that an owner must understand in order to determine if coverage is warranted. Some of these insurances are:
Professional Liability Insurance to defend and pay on behalf of the architect for claims alleging an error or negligence in the performance of professional duties; without this coverage, one puts the practice and it architects in jeopardy. With professional liability coverage, a practice continues to retain some risk such as their deductible, costs exceeding policy limits, or cost for claims that are excluded from the scope of coverage.
Business Owners Insurance is commercial general liability coverage; also known as P&C (or property and casualty). It covers specific business exposures, such as computer equipment, laptops and cell phones, valuable papers and media, accounts receivable, and even business property. Sometimes riders may be added for workers compensation and employee practices liability Insurance.
Cyber Liability Insurance is designed to address potential cyber attacks including digital crimes like cyber extortion or ransomware and deceptive transfer. It also includes coverage and liability for privacy or website media issues.
Key person Insurance is important to help cover business expenses in the event of the loss of an important person to the practice such as a co-owner. In this case, when a key person would pass away, the practice would be able to cover the lost income that the key person would have generated to help pay bills and wages while allowing the surviving owner(s) the time to figure out next steps.
Business Overhead Expense insurance provides financial support for major office expenses if you become disabled. These expenses may include employee salaries, rent, business loans, utilities, insurance premiums, and other expenses your business requires to keep running until you are able to return to work.
In addition, the AIA Trust offers a growing library of practice and risk management-related resources for those starting a firm and running a firm.