With bank rate rises continuously going up, Australia has been stuck in what feels like a never-ending zombie recession – half alive, half dead, and very confusing for Architect business owners!
But regardless of whether your Architecture firm is enjoying the stability of government work, the uncertainty of residential work, or the downright horrors of working with cash-poor developers right now, one thing comes up every week – Architects can’t reliably read their own financial statements.
Practically every client I work with thinks that they’re cashflow positive, but by the same token, when I ask how much, they can’t give me an answer that matches their bank account’s reality.
Why is that?
Why is it so hard to figure out cashflow in an Architectural business?
Having worked with many Architects, I think I have a reliable method to help you figure it out without spreadsheets or tables. Let’s first start with the problem.
Cashflow statements don’t work well in Australia generally.
While most small businesses run on a cash basis (or at least cash basis for GST), their ‘Statement of Cash flows’ in Xero is horrendously difficult to read.
The main reason for this is that we do cashflow on a month-by-month basis in Architecture – usually targeting a fixed revenue each month of around $20,000 per staff member (2026).
But despite all of our planning revolving around monthly revenue targets, our expenditures are on entirely different wavelengths:
- Insurance and subscriptions are Annual
- BAS PAYG (withholding), and BAS (GST) are usually quarterly.
- Salaries are often fortnightly, or monthly. If they’re fortnightly, you’ll get 3 pay periods in a month every 4 or so months, adding 50% cost to your monthly payroll.
- And a myriad of awards costs and publications costs happen at odd moments throughout the year.
All in all, this makes your ‘statement of cashflows’ almost impossible to read, and I often see swings of plus or minus $40,000 month-to-month for a 6-staff business.
This is a uniquely Australian phenomenon, with most of the world working on monthly systems for BAS and monthly for payroll (although there are certainly more difficult countries!)
Your Revenue isn’t actually stable month-to-month
Secondly, most Architectural businesses don’t really plan for the ‘sine wave’ of business Revenue – often with a peak around April, and a deep, deep trough through the Christmas shutdown period.
This means that Architect directors often feel flush with cash in April and make some really silly spending decisions – only to find themselves topping up the kitty as funds run dry by November.
We tend to turn a blind eye to invisible dividends and financing activities.
The final reason why cashflow statements are so hard to read is that they include the murky sections called ‘financing activities’. This section could be almost anything:
- Your dividends
- Loans you’ve taken out for the business
- Beneficiary entitlements
- Tax prepayments
- And of course BAS payments, which could be positive one month as you gain cash that isn’t yours, followed by a sudden negative month when you pay what you owe.
- And a whole host of other – probably miscategorized – transactions.
But that’s why we can’t use our statement of cash flows effectively. There has to be an easier solution!
There is – it’s customizing your profit and loss statement to be on an accruals basis, with allowance formulas to give you a better understanding the outflows.
Rebuild your profit and loss statement to make it work for you – not your tax accountant.
In larger businesses of 30 or more staff, it’s common to have a management accountant – a staff member solely devoted to understanding the finances of the business. This is different from a tax accountant, who only really cares about maximizing your tax return and maximizing their own fee.
But when you’re a small 5-10 person business, you’re not getting this management accounting support – you need to create a Xero sheet that does the heavy lifting for you.
- Open your existing profit and loss statement in Xero.
- Immediately click ‘save as custom’ and name it ‘Profit and Loss – Management’ – now whenever you do any edits, you can click ‘save as custom’ again, and overwrite this report to build out your own super report.
- Click the ‘favourite’ star so it shows in your quick list.
- Click ‘more’ and make sure it’s set to ‘Accruals’ basis – as discussed, cash basis is fairly difficult to use effectively.
Now we’re set up to actually build out a profit and loss statement that speaks your language – not your accountants, and you aren’t overwriting your tax accountant’s reports. You can find this report at any time in Reports > Custom, which is a tab at the top of the reports page.
Making the Profit and Loss statement actually useful.
Now that we have a profit and loss statement that we can freely alter without fear of breaking anything, let’s really mash it up into something that tells a truth you need to hear – ‘Are we making money?’.
To do this, click ‘edit layout’, and group anything together that can’t be changed – I mean rent, cleaning, power, water, bank and merchant fees, and all of the basics that have to happen – and are already optimized. You can just name the group ‘running costs’ and collapse it so that it reads as a single line item.
Then do the same for staff costs – group together superannuation, mileage reimbursements, staff salaries, and anything staff costs into a single line item called ‘staff costs’.
Now everything else that we look at are things that we can actually action – things that need ‘management decisions’.
Once you’ve done this you should essentially be looking at a sheet that shows:
- Your revenue sources
- Your ‘running costs’ as a single line item.
- Your ‘staff costs’ as a single line item.
- Your depreciation of equipment.
- Your subscription costs.
- Your loan interest costs.
- And any other changeable expenses you have as individual line items.
Bonus: split out director salaries (which are actually discretionary salaries) into a separate chart of accounts item, so you can track it separate from staff costs.
Now add the secret cash flow magic.
This profit and loss statement is good – but if you get a $10,000 profit each month here – you’re probably going to run out of money eventually. Why? Because of all of those pesky cash-flow items that hide outside the profit and loss sheet: your dividends, drawings, income tax expense, and financing activities.
These off-sheet activities may be between 5% to 10% of your monthly revenue, so let’s add in a placeholder right on our management profit and loss sheet so we can see and remember them.
- Click ‘edit layout’ in the profit and loss statement.
- Click ‘new equation’, and add in a new equation at the bottom of the sheet.
- In this equation, take your ‘net profit’ for the month, and minus a fixed amount of money – approximately 5% of your total sales for the month, and minus a tax estimate. This would look like:
- ‘Net Profit’ minus ‘0.05 x Total Sales’ minus ‘0.25 x Net Profit’.
This will add a new line at the bottom of every month, which you can name ‘estimate of cashflow’. You can track it month to month and see if it now roughly matches your bank balance changes.
If it doesn’t match? Just amend the percentages in your formula, or if you take a fixed dividend each month, minus that directly in the equation.
Set it up once – manage your business forever.
This sounds like quite a few steps, but actually it doesn’t take long to do. And then for the rest of your business life, you actually have a report that means something to you – something that can meaningfully change the way you look at your business cashflow.
Something that makes you take action!
And I can’t stress how valuable it is to have a business management tool that actually makes sense to you – not your accountant.
So Architects of Melbourne. Architects of Australia. Take action and actually run your business using Xero’s native reports – so that you actually make meaningful change.
Bonus question – what is a good cashflow figure?
For Architects, I think a positive cashflow of 10% of revenue per month is a great target. We run on pretty tight margins, and getting more than that seems pretty tough these days.
However, due to BAS payments and other realities (such as 5 week payroll months), it often actually looks like this:
- Month 1 – Positive 30%
- Month 2 – Positive 30%
- Month 3 – Negative 30%
I spend a lot of time looking at Architect’s businesses – if you’d like to know more insights, get in touch.
