Profit Is What You Keep; Not What You Earn
By Gail Doby, ASID
CVO & Co-Founder, Gail Doby Coaching & Consulting & Design Success University
Designers, I often find, are not always clear on their financial goals. Frequently, they confuse revenue with profit. Revenues are what you bring in to your firm by way of sales. Profit is how much of that money you get to keep once you pay the bills, including payroll. To be sustainable, you don’t just need a business that is earning money. You need a business that is making a profit.
Bear in mind there are two types of profit, gross and net. Net profit is what you have left after you pay yourself a salary or a draw. When setting your financial goals for the year, you want to focus on increasing your net profit. If you are not including what you will get paid into your calculations, you are distorting the true profitability of your business.
Your net profit goal is critical because it is the number from which you need to determine your fee structure. This process is referred to as bottom-up budgeting. For example, let’s assume you work alone (perhaps outsourcing to a part-time bookkeeper) and want to make $50,000 in net profit for the year after you pay yourself a modest salary or owner’s draw.
You know it costs you $50,000 in overhead (insurance, car, rent, utilities, advertising, bookkeeping, etc. to operate). In addition, you pay $100,000 for furniture, fabrics and other materials (Cost of Goods Sold). Add those three numbers together – the profit, overhead and Cost of Goods Sold – and that tells you that you will need to sell $200,000 of products and services to cover costs and achieve your profit goal.
If your fees are 25 percent of your annual sales of products and services, based on $200,000 of revenue, you’ll bill $50,000 in fees. At $200,000 of revenue, you should be paying yourself approximately $40,000 in salary.
If you’re the owner of the business, you’re also in charge of marketing, sales, management, etc., so you will only bill about 50 percent of your time for design services. Based on an average 40 hour work week, and allowing for vacation and leave time, that will work out to around 984 hours of actual time you can bill for the year. However, all your time, regardless of whether you are billing or not, gets charged to the company. At $40,000, that comes to $19.23 an hour, base salary before you figure taxes, insurance, car, cell phone, etc. Let’s round it up to $25 per hour. That’s what we call your loaded or burdened cost. You need to do the same calculations for your employees if you have employees.
Now that you’ve done all the calculations, what should your hourly rate be? The answer is, it depends on several factors, such as how many hours you bill per year. As an owner, you should bill out at least two to four times what you pay yourself. Based on the $25 an hour figure, you should bill at least $100 per hour.
Let’s check our math. You need to earn $50,000 in fees plus $40,000 to cover your base salary. If you bill 984 hours at $100 an hour, you will earn $98,4000, a tad over your goal. Of course, you still have to do all the work to market your services, make the sales, put in the time billed, etc., but now you have a realistic target and a clear idea of what kind of profit you can expect the year.
If you’re on our email list, you probably know that here at Gail Doby Coaching And Consulting we work exclusively with Interior Designers to grow and scale their businesses. Needless to say, we are very familiar with the various different types of businesses, business models, and business owner’s challengess out there!
Throughout our years working one-on- one with interior designers we have identified 5 main “types” of interior design business owners.
Each type of business owner has their own strengths, weaknesses, and challenges they face, which is why we have created the “Interior Designer Owner” quiz that will highlight what type of business owner you are. After taking the quiz you will receive a tailored report based upon the type of business owner you are. This report will detail things you can do right away to improve your business.