Design Your Business for Profit

How to turn revenue into income, by business transformation consultant Gail Doby

If your business isn’t earning a profit, you’re working for free. If you can afford to do that, we’re truly envious. If not, read on to find out how you can turn more of your business’s revenue into your personal income.

Focus on net profit

Most designers focus on what they want to bring in to their checkbook instead of focusing on what they want to keep. Their measure of success is how much revenue or sales (the names are interchangeable, really) they generate. You’ll get better results when you focus on net profit – what you have left after you pay yourself a salary or draw. That’s your true bottom line.

Budget from the bottom line up

Set fees based on what generates bottom line profit for your business instead of comparing your rates to other local designers. We recommend bottom-up budgeting. Start by setting a net profit goal. Then, add your salary or owner’s draw, overhead expenses (insurance, car, rent, utilities, advertising, bookkeeping, etc.), and cost of goods sold (furniture, fabrics, and other materials). This will tell you the total amount you have to sell. Here’s a simple example of how it works:

Base your total fees (and salary) on your sales goal

Let’s say your fees are 25% of your annual sales of products and services. Based on your sales goal of $200,000, you will need to bill $50,000 in fees. At $200,000 of revenue, you should be paying yourself approximately $40,000 in salary.

Know how many hours you can bill

What is your opportunity to earn $50,000 in fees? If you’re the owner of the business, you’re also in charge of marketing, sales, management, etc. So, at most, you will only bill about 50% of your time.

Don’t forget your cost to the company

Your $40,000 salary divided by 2,080 hours equals $19.23 per hour before 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.

Base your billing rate on your costs

There is no simple, straightforward answer to what your hourly billing rate should be. It depends on several factors, such as how many hours you bill per year. As an owner, your rule of thumb should be to bill at least two to four times what you pay yourself. For our example, let’s go with the high end of that estimate, and say you should bill at least $100 per hour (4 x $25 base salary).

Key Tip: Pay yourself a salary
Taking an owner’s draw, and just counting what’s left at the end of the year as yours, distorts your actual costs and true profit.

Track your time

Not tracking your time is deadly for a designer. You can’t manage your time if you don’t track it. Plus, you don’t know if you’re billing all the time you should or are giving it away for free. Why do I say that? Because you don’t have benchmarks (i.e., standards) to estimate how long it will take to do your projects. You can’t estimate your hours for your clients, and they will likely ask or demand an accounting. When they do, not having an answer is not only unprofessional, it could prompt the client to withhold payment. Tracking your time need not be a chore. You can use apps like Toggl, Harvest or Lets Freckle to do it on the fly via your smart device.

Increase your markups

Better markups come from better relationships. Shop at Market to meet the companies you’re buying from, and build relationships with a few key vendors that sell to designers. Once you have established yourself with your key suppliers, you can get better discounts and make bigger margins.

Increase the size of your projects

Ask your current clients about other areas they might be interested in designing. You can typically sell additional work to one out of two current clients, and that’s way less expensive, faster, and easier than closing one out of 10 or 13 cold leads that don’t have any experience or trust in you yet.

Watch your costs

It’s important to keep your overhead down, but don’t fall into the trap of false economies. Over time, there is a greater opportunity to grow revenues and increase margins than there is to cut costs. Three areas that often get cut when cash flow is tight are advertising, marketing and PR, and education. Advertising, marketing and PR generate leads. Education helps you learn more about how to run a profitable business, and that helps you achieve your financial goals. The key to controlling costs is to spend smart. Favor expenses that can generate a return.

About Gail Doby

Gail Doby, ASID, is a mentor, advisor and Co-CEO who is passionate about design, experienced in business, and on a mission to help you experience a quantum leap. Her firm Gail Doby Coaching and Consulting, and its sister company, Design Success University, have been coaching interior designers to make more profit and rapidly scale their businesses since 2008.