Planning for Profit
It’s called the bottom line, but for a business owner it should be top-of-mind. I’m talking about net profit, the money that you get to keep after all the bills, salaries, taxes, insurance, and other expenditures have been paid. If you’re not reaping a healthy profit for your labors, you’re probably underpaid and you could run into serious cash flow problems down the line.
The industry’s annual net profit in 2020 was under 8 percent. That’s not bad for a high-volume, high-turnover business for which the dollars can quickly add up. But most interior design firms are not pumping out projects on a rapid-fire schedule, so they need to aim for a higher rate of net profit to compensate for the time it takes to do the job well. Many factors go into determining what is a desirable net profit for a particular firm. As a rule of thumb, though, I generally recommend to my clients to set a goal of between 10 to 25 percent net profit after they have paid themselves their salary.
At this point you may be thinking, “That sounds great, Gail, but how am I supposed to net double or triple the industry average when I’m competing against others who clearly are settling for less profit?” As with all successful business strategies, you begin with a plan. Don’t wait until the end of the year to dust off the abacus and calculate how much profit you made. Decide in advance what is a desirable and appropriate annual net profit for your firm and create a plan to achieve that goal.
To begin, determine how many projects and/or billable hours you will have to book in order to earn enough gross revenue that will result ultimately in the net profit you are seeking. Next, based on your average project revenue, figure out how many clients you will need to acquire throughout the year to achieve that revenue target. Finally, develop a client acquisition and marketing plan that will deliver the number of inquiries needed to convert into the required number of clients and/or projects. Once you have those numbers, you can track your progress monthly and make adjustments along the way to guide you toward reaching your goal.
A number of variables can influence the outcome of these basic formulas, resulting in either more or less net profit. If this all seems too vague or general, I invite you to get a copy of my new book, Business Breakthrough: Your Creative Value Blueprint to Get Paid What You’re Worth, which includes an entire section on how to set profit goals as well as much more information on how to grow your business so you can continue to increase your profit over time. It’s available now in Kindle format.