Financing an Architecture Practice in Nigeria

Ijatoye O.G. (ARC/07/0965)Financing an architectural practice in NIgeria

Financing An Architecture Practice In Nigeria

IJATOYE O.G.

Department of Architecture,

Federal University of Technology,

Akure

,

ABSTRACT

Architectural Building practice in Nigeria became organized starting from the 1930s but till date, it has been faced with a lot of challenges ranging from financing of the practice; inadequate human, material and equipment resources development to non availability (or poor implementation) of uniform regulations, guidelines and standards for the building processes). Architects aspire to financial health as they cannot attain their practice goals unless they do. Financial governance differs from governance areas such as the environment, safety standards labor rights, human rights, and even international trade in the sense that nongovernmental organizations are by and large industry organizations with budgets that dwarf those of national regulators, and with track records of favoring their own narrowly defined short-term interest at the expense of larger and longer-term interests. This paper hence discusses the financial aspect of architectural practice in Nigeria.

INTRODUCTION

Due to the Independence of Nigeria in 1960, an upward and forward trend in architectural practice has been resulted at. However, most construction organizations available until the sixties were overstressed with contracts. Nigeria is a developing country and her building practice is still grappling with a lot of inherent challenges, ranging from inadequate technical and managerial know-how to insufficient financial, material and equipment capital base (Oluwakiyesi 2011).

Managing the financial aspect of Architectural practice of utmost importance. Keeping solvent requires sound cash management. Solvency is a cash issue: How muchcash is needed? For what purposes? When? From what sources?

Cash management is a systematic procedure for forecasting and controlling the cash that flows through the firm. This paper highlights the what it takes to finance an architectural firm in Nigeria and objective of cash management; to ensure that adequatecash is always on hand and that cash surpluses, when they exist, are invested wisely.

ARCHITECTURAL PRACTICE IN NIGERIA

Architectural practices or firms may be structured either as sole proprietors, or corporations which is also referred to as limited liability companies. Each categories could be large, medium or small. Basically, the Nigeria architectural practice varies from the sole proprietorship practice through the partnership, the corporation, also known as the limited liability practice, the group practice, multi-disciplinary practice, to the professional design consortium.

The sole proprietorship practices are firms with a single principal and the most common in Nigeria basically because of the socio-cultural environment. This category is has secured privacy, with personal client-architect relationship, however, the scope of commission is limited and there is absence of a second professional opinion at the principal level.

Unlike the sole proprietorship practice, the partnership comprises of a relation between two or more people; may be an architect and any other professional in the building design team which could be as a result of the mutual support which would be gained and the combined resources. The enterprise is shared resulting in a reduced overheads and adequate access to capital. There are various types of partnership practices; limited, salaried, associates and the consultants.

Partnership where the liability of some, not all partners are limited by agreement is refered to as limited partnership, while a partnership where a partner is paid a fixed salary with or without share in the profits, thus having his rights and liabilities different from those of full partners is called the salaried partnership. The Associates consist of the senior employees who have the status of principals but are not partners whereas the Consultants are contracted for a specific assignment and may be paid by a kind of retaining fee which could be with or without some share in the profits.

The Limited Liability Practice or Corporation is peculiar as other liabilities are limited but the professional liabilities are not limited. Since the sales of shares is controlled, it is often structured as a closed corporation and majority of the shares is held by the registered architect. Capital can be raised from the public here and continuity is assured. However it is of disadvantage as the ownership and the management is separated, hence, policy decisions can be delayed and there is an impersonal relationship with the client.

The Group Practice is structured by the collaboration of independent architectural firms but with varying commitment, having no full commitment of a proper partnership agreement but allows the partners and staff to experience working together, with the partners of the associating firms temperamentally compatible.

Professional Design Consortium is unlike the group practice in that it comprises of different professional skills acting as one for carrying out projects, jointly, nevertheless, they retain their separate identities and each carries out her own responsibility to the building owner.

The Multidisciplinary practice is however difference from the consortium as it embraces all the skills in the main professional building design skills or some of it. The work procedures might not be same as that of the conventional single skill practices or ad’hoc consortia of such practices.

Architects in the Public Service performs essentially the same functions as the architects in the private sectors. They are employed in Nigeria in both advisory and executive capacities and thus help in moderating the standards and costs on some special projects of the government.

The Nigeria National building code thus states how design, practice and building of Structures should be undertaken in Nigeria. It embodies minimum standards for design and specifications, costing, construction, alteration, modification, demolition, repairs, locations and the use of any building or structure whether existing or proposed within the Federal republic of Nigeria (Page 5, Nigeria Building Code, 2006)

FINANCING ARCHITECTURAL PRACTICE IN NIGERIA

To stay in business, architects must practice at whatever profitability level, must fulfill promises made to clients and must fulfill their own practice goals which includes appropriate rewards for performance and risk and a reasonable return on the investment of the firm owners. According to Peter P. (2008), a principal consultant of the Coxe Group, Inc., marketingand management consultants to design professionals who has written and lecturedwidely on practice issues, including compensation management, several factors determines the financial planning of an architectural practice / firm as the financial health of the practice requires the understanding, planning, monitoring and control of these three inter- related aspect of the practice’s financial picture.

These factors include:

1. Profitability: this is the ability to create an excess of revenue over expenses and it is required at three levels:

1. For the firm, generally in the form of retained or reinvested earnings, so it can providefor capital investment, endure downward economic cycles, and sustain growth
2. For those who produce the profit, as a reward for having done so.
3. For the risk taken by firm owners and as a return on their investment in the firm.

As a result of the attendance of Architects to profitability, they ensure that they will not incur more expensethan revenue on a project or on a firmwide basis. The normal project cash cycle includesthree steps: performing services, invoicing, and collecting cash to cover the costs- both direct and indirect—of performing the services. If the architect manages successfully,this cycle not only yields sufficient cash to cover costs but also returns profit tothe firm. Practicing at a loss means two things: There is no profit and, even worse,essential costs are not being covered. Regardless of whether the firm uses the cashmethod or the accrual method for its accounting, losses eventually result in a cashdrain—more is expended than is taken in.

1. Liquidity: this is the ability to convert an asset to cash with relative speed and ease and without significant loss in value. Peter P (2008) explained that (short-term) assets. Fixed assets are assets such as real estate, leasehold improvements, furniture, fixtures, equipment, and automobiles that they do not intend to convert to cash in the foreseeable future. Current assets include both cash and other assets that must be converted to cash, especially accounts receivable (the value of services billed but not yet collected) and work in progress (the value of services performed but not yet billed).

To keep a practice financially viable, the architect must maintain the liquidity ofthe firm; this is accomplished by invoicing regularly with the goal of continually convertingwork in progress to accounts receivable. Then, to convert accounts receivableto cash, the architect must follow up by assiduously maintaining collections.

1. Solvency: is the ability to meet financial obligations as they come due. Solvency is the firm’s ability to pay its bills. Solvency and profitability are closely related; a firm that is unprofitable will, in the long run, not have enough money to pay its debts. In the extreme, the inability to pay debts when they come due leads to insolvency and bankruptcy. (Peter P, 2008)

The figure below shows the cash cycle.

MANAGING CASH FLOW

An Architectural Practice in Nigeria; T&K Consults located at Ilupeju, Lagos State has her well manage cash flow projection, made as of March 1, looks at anticipatedrevenues in terms of when the firm expects to collectthem. For example, a total of N720,000was billed inJanuary;of this, N180,000was paid in January, an additionalN430,000in February, and the remaining N108,000is projectedfor collection in March. Similarly, 25 percent of theanticipated billing for March (N 165,000 of N 660,000) isexpected to be earned in March, another 60 percent(N 396,000) in April, and the final 15 percent (N 99,000) inMay.The table below shows the cash flow for the small sole proprietorship architectural Firm; T&K Consults.

CASH FLOW CONTROL

Cash budgeting is planning in advance for cash that will be required in the future. Controlling cash flow requires measuring actual performance against the budget and taking corrective action as needed. Techniques for managing cash include the following:

1. Sustaining backlog by developing a continuing flow of new projects and services
2. Billing promptly and correctly, ensuring that clients are aware of the services provided
3. Monitoring cash receipts and pursuing collections
4. Controlling disbursements
5. Preparing cash budgets on a regular basis and using them to monitor actual cash flow

Billing and collection are especially important in managing cash flow. From an overall practice perspective, clients who are slow to pay may be in the process of becoming less satisfied or even dissatisfied with the firm’s professional service—or perhaps experiencing other problems that do not bode well for the project. In managing cash flow, timely billing and collections are only half the problem; the other half involves controlling disbursements. Careful timing of disbursements can be an effective way to control cash outflow.

The firm has more ability to control when it makes a disbursement than when it receives a cash payment. It can defer payment to vendors and other payees, reduce the draws or salaries of principals and, if necessary, borrow funds on a short-term basis.

If cash projections indicate a continuing deficit, financing from other, longer-term sources may be needed. Following are some possibilities:

1. Refinancing a major asset with a long-term note or mortgage
2. Adding capital from existing partners, new partners, or shareholders
3. Retaining additional corporate earnings rather than distributing all profits
4. Deferring capital or other expenditures

FINANCIAL STRENGTH

There are many indicators of financial performance and financial health. Often these indicators are expressed as simple ratios of numbers created in everyday operations and reflected in the firm’s income statement or balance sheet. These ratios can be useful in establishing the need for working capital, assessing productivity, managing overhead and project expenses, establishing fees, and seeking credit.

It is explained in the figure below

CONCLUSION

Sound management of project expenses requires planning these expenses beforethey are incurred (creating a project budget and work plan), monitoring revenues andexpenses as the project proceeds, and taking corrective action when actual performancevaries from the plan.

REFERENCES

Lowell V. G. An Architect’s Guide to Financial Management (AIA Press, 1997), Chapter 4

McDonnell, Brett and Daniel Schwarcz 2010-2011. Regulatory Contrarians. North Carolina Law Review 89:1629-1682.

National Building Code of Nigeria, 2006. Pdf

Oluwakiyesi, T. (2011). Construction Industry Report: A Haven of Opportunities Vitiva Research [online]. Available from [Accessed 3rd January, 2012].

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