The ArchVIZ BIZ – Growing a Studio : The Finance
We covered Art, Technology & Studio Culture so far, and now it’s time to talk about money. Growth and success can be expensive. Thankfully, there are things you can do to stay on top of your finances. There’s even free money available in most countries!
Leave the numbers to the professionals and focus on running your studio.
If you are a real pro with numbers and want to handle it, do it, but you probably have enough to worry about as it is! Hiring good talent costs money, but what you spend here will pay off a hundredfold.
So, who to hire?
First off, hire a good bookkeeper and accountant, or have a person on your team dedicated to these functions.
I think that’s a given, but I’m always surprised by how many small businesses treat finances as an afterthought.
Too many business owners try to save money by doing these functions themselves. You have enough to worry about as it is. Leave the numbers to the professionals and focus on running your studio. The money you spend on these services will pay for itself over and over.
Secondly, hire an outside payroll administrator to manage your pay.
They will make sure both your team and the government get the right funds at the right time. Speaking of governments, I highly recommend you open a second bank account to stash away the taxes you collect in your fees. Resist the temptation to spend those funds (we have a REALLY hard time with this) or you could end up in some pretty serious trouble (we have).
When making decisions on spending money, request an up to date set of financial reports and make sure you can afford the purchase. Also, use the reports over time to predict revenues and establish budgets (we’re working on that). To keep making money, you need to know when and where you’re spending it.
From the last passage, you might think the only role of government is to take your money. They can, however, be a great source of free money for small to medium sized businesses like most illustration studios tend to be. Most governments have incentives to hire young people and recent grads (perfect for our industry), grants related to research and development (start looking into real-time interactive on the government’s dime), and some jurisdictions will have incentives for you to locate within their region.
These are only a few of the benefits you might be able to apply for. Again, this is a time-consuming task. It is, however, a function you can hire out. There are agencies you can hire on a contingency basis (typically up to 30% of the grant value, depending on the size of the grant) and they can really help to increase your likelihood of success.
Maybe you can tell us what do you know about in your own region?
Not Free Money
After you’ve exhausted free money, you will most likely have to turn to a bank. First off, if you don’t have your books and taxes in order, the bank won’t even look at you. Head back to step one and get yourself a good bookkeeper and accountant.
The first thing a bank will offer you is a line of credit. As a starter, they will probably give you something small ($10,000 to $35,000 CAD is pretty normal here), which will likely need to be secured by a property in order to get the lowest rates.
No property? No problem!
They’ll probably give it to you anyways (at a higher interest rate) as long as you can show a healthy balance sheet. Manage this for a couple years and the bank will likely offer you a much bigger line of credit, which is, usually based on a percentage of your receivables (money owed to you by your clients) under 90 days old. Don’t be afraid to take this money.
As your clients and projects grow larger, you ability to collect your fees will naturally slow down. Large clients in architecture, engineering, and construction here in Canada tend to take upwards of 60 to 90 days to pay. But your rent is due every month and your team needs to get paid every two weeks or so as well. Lines of credit are useful tools to bridge the gap between payments due and getting paid by your clients.
By managing your credit facilities wisely, you can build a relationship with your bank that will become the backbone for all your future growth plans.
Get to know your banker. Get your banker to know you. You’re going to need them for a long time.
Another great tool banks can provide you is a capital lease line. When making major purchases or upgrades (our 3DS Max licensing costs us $60,000 CAD a year!) it can be very difficult to pay for it in one go. By setting up a leasing facility with the bank, you can get decent rates (better than most providers will offer you) and better terms.
Once you’re swimming in money, all is good, right? Not so fast.
Prequalify you up to a limit and then allow you to lease back any equipment or upgrades that fall within your agreement on a monthly basis. This will really help manage cash flow.
Speaking of cash flow, did you know the simple move from bi-weekly payroll to a semi-monthly payroll can make a huge difference? It will smooth out the payments due to a regularized schedule. In any given year, some months will have three pay periods as opposed to the normal two and can really dent your ability to manage cash flow.
So it’s nice that you got all that free money from the government and your bank has loaned you a pile of theirs. But the bank will want its’ money back at some point. In fact, even better, don’t use the bank’s money at all. This can be difficult (we’re not there yet) but can be achieved. Start by having a person(s) on staff dedicated (part time for a smaller studio, or full time for one the size of ours – this is also a function your bookkeeper or accountant may provide) to collecting your receivables.
Show Me the Money
We’d like to think that our clients will just pay us when we send them an invoice, but in reality getting payment requires work.
Often times, sending your invoice doesn’t mean it automatically gets entered for payment. Architects are notorious for avoiding administrative tasks. Have your receivables person build relationships with the persons responsible for writing checks for your clients. Follow up with them regularly and make sure the architect passed on your invoice. Better yet, get to know them so well that you can copy them on the emails.
Try to get money before you start (it’s quite customary to get 30% up front) and when you finish (some studios require full payment before high res delivery). While these are good tools, they can also hamper your ability to compete in the marketplace with larger, more established clients. Having a bank or government financing that enables you to work within the cash flow cycles of your larger clients will make you more attractive, even if you are asking for a higher fee than your competition. Being short on cash(flow) has the potential of driving you to do bad things for your business considering the bigger picture.
Used all together at the right times, these financial tools should enable smooth and steady growth.
I know this can be way more difficult than it sounds; I’ve lived through it and know first hand. But hopefully, my pain can be your gain! Ronen tells me there are applications out there that can make number handling (time tracking, invoicing, collecting payments and reports) easier and fun. Two such options you can try are Freshbooks and Costlocker. If you decide numbers really aren’t your thing, you can always hire a fractional CFO to help you manage all of it. They can be expensive, but a good CFO is worth their weight in gold.
Part 1 - Starting a Studio : Art Part 2 - Starting a Studio : Technology Part 3 - Growing a Studio : Culture Part 4 - Growing a Studio : Finance Part 5 - Growing a Studio : Client Management