ARE Live: Firm Financial Documents
Learn more about firm financial documents and what you need to evaluate the financial health of an architecture firm on this month's ARE Live.
This episode is structured like a case study. We’re going to read through the scenario and get an overall feel of what we’re talking about. Here’s our scenario:
Hayley, Emily, and Chris are creating a new architecture firm together. Their experience and qualifications are listed below.
Hayley is a Missouri and Louisiana registered architect with experience on commercial projects, historic rehabilitation, and coastal sustainability. Emily is an Illinois and Indiana registered architect currently working and living in New York and seeking license reciprocity there. Chris is a New York registered architect with experience in mixed use and residential projects in the New York metropolitan area.
The team wants to primarily pursue projects that match their skill set, respond to RFPs in order to gain new projects, and plans to hire new employees in their first year in order to round out the team’s capabilities.
The three architects have a network of preferred consultants in their area, and based on passed experience, they expect consultant costs to amount to 25% of the firm’s billings.
Referring back to the source
There are different strategies for approaching case studies, whether to take them at the beginning or end of your exam. There are pros and cons of either way, but regardless of when you tackle the case studies, make sure that you read through all your material carefully. Try to remember all the important pieces of information, and as you go through the questions, think back to your scenario and how the questions might apply to it.
People are often used to thinking of the case studies as resources, but the scenario often gets forgotten, and there are some useful nuggets of information in there that are going to be applicable
Use process of elimination
As you read through the questions and potential answers, use the process of elimination for any that you know are definitely not the correct option to help you narrow it down. In the first question, you’re evaluating abridged executive summaries and trying to determine which is the most appropriate for the firm.
In each of the answers, look for anything that you can mark as a red flag that might mean the answer is incorrect. For example, the first option mentions Connecticut and New Jersey, but if you refer back to the scenario, you’ll remember that none of the founding architects are licensed in either of those states—so it doesn’t make sense to mention it in the executive summary.
You can use the strikethrough tool on the exam to mark this as an incorrect option and move on to the rest. If you see answers that may be right, keep them in mind as an option, but read through all the potential responses before moving on to the next question.
Make tangible connections
It can be frustrating to work through these kinds of questions, because how people make business decisions in real life may be different than how they appear on the exam. But when you see questions like this on the ARE, think back to tangible things that you can reference. For instance, to practice in a certain jurisdiction, an architect needs to be licensed there. That’s a really important tangible piece of information that makes some of the answer options incorrect, so remembering it can help you find the correct one.
Another tip is to think about what the references would say about a specific situation. The Architect’s Handbook of Professional Practices talks about different business plans and gives some information about what kinds of projects you would seek based on your experience. The references that you have available talk about starting out with projects that you’re already experienced in—so don’t start working on healthcare projects if you have all residential experience.
Always try to tie your answers back to what’s available in the references, because that’s ultimately what the ARE questions are going to be based on.
Get comfortable with profit/loss statements
The second question is a finance question where all the numbers are pulled from a profit/loss statement, which on the real ARE would likely be included as a resource that you would then have to go and reference before answering the question.
In order to answer a question like this, you should be comfortable with what a profit and loss statement looks like and what types of expenses are categorized in which places. Everything referenced in the question is an indirect expense, except for bad debt allowance, which is actually included in the miscellaneous revenue and expenses section, which is at the very bottom of this kind of statement.
To help you save time on the exam looking for where different expenses are, get comfortable reading a profit loss statement during your studying, and have a good understanding of what kind of information is included and where.
Stick to the question
The third question asks about hiring a new employee and evaluating potential hires for that role. This is another soft skills question where the decision you make in real life may differ from what the ARE is asking you for, so you have to read the question and all the answer options carefully to make sure you’re actually asking what the question is asking of you.
Question length doesn’t equal question difficulty
Question four is only two lines long, but that doesn’t mean it’s easier than any of the other questions, and it also doesn’t correlate to how long you’ll spend answering that question. Even though the question itself is quite short, you need to spend some time finding a lot of information and doing calculations to get the right answer.
Understanding firm financial documents is a key part of passing this exam, so make sure you’re familiar with the different documents and how they work. Formulas are also super important, and you need to understand the intersection of how documents and formulas work together to be able to answer these kinds of questions.
To see all these questions in detail and to hear how Hayley and Emily work through them, check out the recordings below!