Financial and Risk Management Flashcards
(120 cards)
1
Q
What are the types of Financial Management?
A
Basic Accounting (General Ledger) Project Cost Accounting
2
Q
Describe Basic Accounting.
A
Applicable to all business
Keeps track of money flowing
Provide overall financial status of the firm
Fundamental for decisions with profitability and survival
3
Q
Describe Project Cost Accounting.
A
Tracks revenue, expenses and profit by projects
Evaluate time spent and how it affects the health of the company
Helps to decide how to allocate resources, manage projects and develop accurate proposals
4
Q
What is Accounts Payable?
A
Amount owed not yet paid (goods/sevices)
5
Q
What is Accounts Receivable?
A
Money owed by others (invoices/services)
6
Q
What are Tangible Assets?
A
Cash, inventory, machinery that can be measured in monetary terms
7
Q
What are Intangible Assets?
A
Patents, Copyrights, Trademarks that can be measured in monetary terms
8
Q
What are Current Assets?
A
Resources that can be converted into cash in one year
9
Q
What are Fixed Assets?
A
Resources that are retained for a long period of time
10
Q
What is a Chart of Accounts?
A
List of various accounts and its number to keep track of money
11
Q
What is included in the Direct Personnel Expenses?
A
Employee salaries plus mandatory and discretionary expenses
12
Q
List Mandatory Expenses
A
Taxes and Health Insurance
13
Q
List Discretionary Expenses
A
Meals, Party, etc
14
Q
What is Direct Labor?
A
All labor that is direct chargeable to a project (technical staff, principal and support staff)
15
Q
What is Indirect Labor?
A
All labor not charged to a specific project (administrative, office and marketing personnel)
16
Q
What is Discretionary Distribution?
A
Voluntary distribution of profits to owners and non-owners
17
Q
What is included in the Discretionary Distribution/
A
Performance bonuses
Profit sharing
Incentive compensation
18
Q
What is Liability?
A
Claims against the business
19
Q
What is Gross Revenue?
A
All revenue generated during a stated period of time
20
Q
What is Net Revenue?
A
Money that remains after all expenses are paid (revenue minus expenses)
21
Q
What is Overhead?
A
Fixed expenses (rent, leases, electricity, telephone services, etc)
22
Q
What can be included in Other Assets?
A
Securities and Copyrights
23
Q
What are the accounting methods?
A
Cash Accounting
Accrual Accounting
24
Q
Describe Cash Accounting
A
Revenue and expenses are processed when received/paid the money
25
Main advantages of Cash Accounting?
Better to track actual cash flow
Very simple and usually used by a single-person business
Grouped in individual accounts for auditing purpose, review, tax preparation, management and analysis
26
Describe Accrual Accounting
Revenue and expenses are processed at the time you receive/send an invoice (money not received yet)
27
Main advantages of Accrual Accounting?
Gives a better picture of a business long-term financial status
Grouped in individual accounts for auditing purpose, review, tax preparation, management and analysis
Uses double-entry bookkeeping and posted to a ledger where transactions are grouped into individual accounts
28
What is Double-entry Bookkeeping?
All transactions chronologically listed in a journal
29
What is the typically accounting method used by Architectural firms?
Modified Accrual Basis
30
Describe Modified Accrual Basis method
Firm records fee revenues, expenses billed to the client, and invoices from outside consultants
31
What is an Accounting Statement?
Reports from information entered in journals and ledgers
32
What is a Ledger?
A book or other collection of financial accounts of a particular type
33
What are the main Accounting Statements?
Balance Sheets Statements
Profit and Loss Statements
Cash Flow Statement
34
Describe Balance Sheets Statement
Summarizes all Assets and Liabilities
Shows financial position of the business
Reflect the Net Worth and owner's equity
Only statement for a single point in time (snapshot)
35
What is Net Worthy?
Total Assets minus Total liabilities
36
What is Owner's Equity?
Money invested by stockholders
37
What is the summary of a Balance Sheet?
Total Assets = Total Liability + Net Worth
38
Describe Profit and Loss Statement
Lists all the income and expenses during a certain period of time
It reflects the profit or loss for that period
39
Describe Cash Flow Statement
Shows actual inflows and outflows of cash
| Measures the month-to-month health of the business
40
What is the fundamental equation for a Profit Planning and Financial Management?
Profit = Revenue - Expenses
41
Main actions to make a firm profitable?
Control of expenses
Reducing Overhead costs
Use of softwares to control work performance of the projects
42
Main actions to increase revenue?
Increase amount of work and fees
43
List financial reports that an Architectural firm can use
Project Progress
Office Earnings
Aged Accounts Receivables
Time Analyses
44
What is part of a Progress Report?
Hours and labor cost for each phase of the project
(reflects current period and total to date in comparison to what was estimated)
Shows direct costs (consultants, overhead allocation, and reimbursable expenses)
45
What is the main purpose of a Project Progress report?
Give the PM and firm management a accurate look at the status of the project and if necessary actions are necessary or not
46
What is an Office Earnings Report?
Summary of each project in terms of the amount of revenue it generates, expenses it has incurred, unbilled services, percentage of completion, and profit or loss to date
Helps to control whether project are being profitable or not
47
What is part of an Aged Accounts Receivable Report?
Show the status of invoices for all projects, whether or not they being paid
Show the age of the invoice (date issue/payment date)
48
What is the average time frame to collect an invoice?
60 days (more than that needs special attention)
49
What happen if a firm has unpaid invoices for more than 90 days?
Firm is loosing money because it is not charging interest
50
What is a Time Analyses Report?
Report that lists hours spent on direct labor, indirect labor, vacation time, sick leave, and holiday for each employee
Generates the Chargeable Ratio or Utilization Rate of each employee
51
What is a Chargeable Ratio?
Direct labor time / Total time
52
What is the minimum Chargeable Ratio for a firm to break-even?
60 to 65% (average all employees)
75 to 85% (average design team)
*Principal can be a little lower since they spend most of the time devoted to non-chargeable work*
53
What is a Financial Ratio or Performance Indicator?
Method to measure the financial health of the firm and whether corrective actions are needed
54
What are the Key Financial performance indicators
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Utilization Ratio
Overhead Rate
Break-even Rate
Net Multiplier
Aged Accounts Receivable
Profit Earning Ratio
Net Revenue per Employee
```
55
What is the formula for Utilization Rate, average target percentage and what it measures?
Formula: Billable hours / Total hours
Target: 60 to 65% (staff employees) / 75 to 85% (design team)
Measures efficiency and effectiveness of labor
56
What is the formula for Overhead Rate, average target percentage and what it measures?
Formula: Direct expenses / Indirect expenses
Target: 1.5 to 1.75% of direct labor
Measures: Cost of business not attributed direct to projects
57
What is the formula for Break-even Rate, average target percentage and what it measures?
Formula: (Employee hour x Overhead Rate) + Employee hour
Target: 2.5 to 2.75 of direct labor
Measures: Cost for doing business for every dollar spent on direct labor
58
What is the formula for Net Multiplier, average target percentage and what it measures?
Formula: Net Operational Revenue (operating expenses - revenue) / direct labor
Target: 2.75 to 3.25 or higher
Measures: Revenue for every dollar spent on direct labor
59
What is the formula for Aged Accounts Receivable, average target percentage and what it measures?
Formula: Annual Average Acc. Recvb. / Net Operating Revenue (NOR) x 365 days
Target: 45 days
Measures: Average interval between invoice date and payment
60
What is the formula for Profit Earning Ratio, average target percentage and what it measures?
Formula: Profit before distribution-taxes / NOR
Target: Equal or greater than what was planned to the year
Measures: Complete project with profit
61
What is the formula for Net Revenue Per Employee, average target percentage and what it measures?
Formula: NOR / # Employee
Target: As high as possible
Measures: Revenue per employee
62
What is the Revenue Per Employee used for?
To establish realistic Net Operating Revenue for the next year budget
63
What is the formula for Current Ratio, average target percentage and what it measures?
Formula: Total current assets / total current liabilities
Target: More than 1.5 (minimum 1.0)
Measures: Firm's ability to meet current obligations
64
What is Net Profit?
Percentage of profit based on net revenue
| Formula: Total annual revenue - expenses
65
What is a Liquidity Ratio?
Ability of a company to pay its short term financial obligations as they become due typically within one year.
66
What is included in a Liquidity Ratio?
Current Ratio
| Quick Ratio
67
What is Quick Ratio
Liquid Assets (Current Assets - Inventory - Pre-paid expenses) / Current Liabilities
68
Is inventory considered Liquid Asset?
No, because if inventory needs to quick become cash, company needs to sell with discount
69
What is considered Liquid Assets?
Cash
Cash Equivalents
Accounts Receivable
Marketable Securities
70
What is the most common method to set service fees?
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Charge an hourly rate per staff member working on project
Past projects (construction cost, project type, square footage)
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71
How Billing Rates are determined?
Employee salary + fringe benefits + office overhead + allowance for profit
72
What are the basic steps for a good Managing Account Receivable?
Contract Terms
Submit Invoice Promptly
Make sure invoices are complete
Regular Procedures to track accounts
73
What should be included in a contract to cover collecting service fee?
Itemized terms
Basis of fee
When and in what form invoices will be sent
When payment is due
Penalties for late payments
Interest rate for payments after certain amount of days
Provisions for nonpayment, including stopping work and no presentation until payment is received
Attorney should be consulted
74
What should be the ideal billing cycle for the payments?
Every month
75
If Reimbursable expenses are part of the invoice, what should be included?
Appropriate documentation and past due amount
76
Main procedures for Tracking accounts?
Send past-due notice after 30 days
Make personal calls
Keep written record regarding collection
Old accounts should be priority for collection
77
If payment policy is not fully stated in the contract, what the firm can to have it covered?
Provide a Standard Policy Statement at the start of the project
78
What are the benefits to controlling overhead?
Increase the firm's profit
| Allow the firm to offer lower fees than competition
79
What are the ways to minimize heavy overhead expenses?
Minimize non-billable labor (marketing, general coordination, admin)
Control non-labor direct expenses, such as prints, computer charges outside company, supplies, postage, delivery, and local travel
80
What are the ways to minimize light overhead expenses?
Shop for phone, internet, and communication services
Reevaluate office's location and space used
Team up with other firm's to continuing education
Revise insurance policies
81
What can Legal Issues involve?
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Contracts
Firm's Structure
Human Relations
Financial Management
Insurance
Professional Conduct
Copyright
Expert Witness Involvement
Obligations to the Public
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82
What is Agency?
Legal concept of one person (agent) acting on behalf of another (the principal) in dealing with another (third party)
83
What are the main responsibilities of an agent?
Create a legal relationship between Principal and Third party
Keep principal (owner) informed about actions, progress and issues of the project
Convey requests from owner to contractor
84
What should the Standard Agreement forms and General Conditions of a contract aim to minimize?
Potential problems, by clearly defining the duties and responsibilities of the parties
85
By law, what duty means?
What one person "owes" to another in a relationship
86
In Architecture, what are the ways that duty is stablished?
Terms of a contract
Legislative Enactment
Architects Conduct
87
What are the implied duties of an architect?
Cooperating with contractor
Not interfering with contractor's work
Giving relevant information to contractors
Assisting the owner in coordinate work
88
What is Liability?
Legal responsibility for injure another person or damage to property
89
What is Negligence?
Failure to use due care to avoid harming another person or damaging property
90
What are the conditions that need to be met to proof negligence?
Legal duty established
Breach of that legal duty
Breach of duty was the cause of the damage or injure
Not meet Standard of Care
91
What are the ways that an architect can defend against claims?
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Betterment
Statute of Repose
Statute of Limitation
Concept of Privity
Indemnification Clause
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92
Explain Betterment
Usually applied to claims of omission.
| Used to cover additional cost of a material that was specified incorrectly.
93
Explain Statute of Repose
It varies from state to state
| Begins at completion of the project
94
Explain Statute of Limitation
It varies from state to state
| Begins when design or construction defect is discovered
95
What are the four general categories of risk factors?
Contract / Negotiation
Client selection
Project team capability
Communication
96
What are the main risks for Negotiation and Contracts?
Unclear of Inappropriate Scope of Services
Did not formally evaluate risk
Contract not in place before work started
97
What are the main risks for Client selection?
Client inexperienced in design issues
| History of claims / litigation
98
What are the main risks for Project Team capability?
Inexperienced design staff
Inexperienced on-site staff
Inexperienced PM
99
What are the main risks for Communication?
Lack of procedures to identify conflicts
Project issues and disputes not handled correctly
Scope of Service not explain to client
100
What are the strategies to Avoid Risk?
Select project type that fit firm's experience and expertise
| Work with clients who have good reputation
101
What are the strategies to Transfer Risk?
Contracts
| Insurance
102
What are the strategies to Assume Risk?
Accept work within the firm's capability
| Enough money to keep insurance paid
103
What are the strategies to Control Risk?
Adopt best practice (maintain documentation) and consistent procedures (quality control programs)
Train employees
Hire lawyers when necessary
Avoid last-minute changes
104
Explain the Concept of Privity
Common law principal which one party cannot sue the other if there is no contract biding them
105
Explain Indemnification Clause.
Clause that holds harmless owner / architects for any damage, claims, or losses resulting from the performance of any work on the project with whom owner / architect have no contract relationship
106
Besides Indemnification Clause, what other actions can be taken to minimize third-party claims/
No language in the contract that expressly states or implies responsibilities to provide management, supervision, coordination, planning of construction, unless those services are provided
No directions for methods of construction
Point out obvious construction safety problems to contractor, following up in written with contractor and owner. If problem is not correct, suggest to the owner to stop construction
107
What are the categories that Copyrights involve?
Drawings, specifications, other pictorial or graphic representations
Building itself
108
Legislation that protects architects against replication of a project?
The Architectural Works Copyright Protection Act
109
Is The Architectural Works Copyright Protection Act applied to all buildings?
No, only for the ones erected after December 1990
110
What are the main points included in the copyright?
Copy or derivate work of a project cannot be made otherwise authorized by architect
Architect owns the copyright unless he/she is an employee of the building owner or assigns the rights to the owner
Architect should register the work with the US Copyright Office within three months of the "publication" (completion of the building)
111
What is stated on the AIA B101, Agreement between Owner and Architect about the Instrument of Service?
Architect has ownership of the Instrument of Service and retains all common law, statutory, and other reserved rights, including copyright
112
Can owner keep the Instrument of Service if he/she terminates the contract at his/her convenience or architect terminates due to owner's suspension of the project?
Only if a fee is paid
113
What is the best time to minimize risk with client?
Marketing
114
What is the purpose of the Instrument of Service?
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Construction
Using
Maintaining
Altering
Adding to the project
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115
According to AIA Document B101, what type of insurance an architect should have?
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Professional Liability
General Liability
Property Insurance
Automobile Insurance
Works Compensation
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116
According to AIA Document C201, what type of insurance an owner should have?
Liability
| Property
117
According to AIA Document C201, what type of insurance a contractor should have?
Worker's compensation
Automobile Insurance
Contractual Liability Insurance
Damage to other properties
Personal Injury (slander, libel, false arrest
Damages of bodily injury, occupational sickness, or death of employee
Damages of bodily injury or death to people other than employee
Bodily injury or property damage arising when after the job is complete and the contractor has left the site
118
What is an Instrument of Service?
All intelectual property. Includes all documentation used to develop the project
119
Which AIA Document states the Instrument of Service?
B101, Agreement between owner and architect, section 7
120
What should the architect do in the case that owner gets ownership of the Instrument of Service for future use?
Architect should include Indemnification language to protect against any claim that might arise from its use
