You’ve achieved your dream and are a million-dollar firm! But though you always felt that you could be a powerhouse design firm, you find that your net worth doesn’t align with that revenue milestone. The problem is that in a firm with 3 to 10 employees, the profit doesn’t just suddenly vanish overnight. Rather, it slowly leaks out, unnoticed, until it’s too late. Usually, that profit has been leaking out through “soft pricing” and logistical details that have not been managed effectively―if at all. If this scenario sounds familiar, it’s time to focus on achieving true financial freedom. To do so involves shifting from “working in” the design business to “working on” the business model. It’s a challenge facing many design firms, but addressing the challenge and then working to master it offers the reward of a significantly more profitable business.
Here is how to identify and fix profit leaks in your interior design business and step into your role as a creative and strategic CEO.
Recovering the Invisible Hours
Designers often provide numerous client updates or vendor coordination, but do so without logging the time. They end up operating as “people pleasers” and forget that they are running a business. Providing excellent service is a sign of good business, but it’s important to remember that a “good business” also should be a profitable one. If you don’t keep this in mind, you won’t be able to stay in business. Be sure that you and every member of your team keep track of their time. Without doing so, you’ll never be able to track the true cost of a project, and it creates an invisible leak in your interior design net profit margins.
In business administration, “friction” refers to challenges that slow down processes and make tasks more difficult. Some of the causes are inefficient workflows and poor communication. In high-end residential design, administrative “friction” usually involves emails, tracking shipments, and scheduling installations. If not strictly billed, these duties can easily consume 30% of your team’s capacity.
Move toward tighter boundaries―to a culture where every minute spent moving the project forward is included in your project management tools. Soft boundaries lead to a loss of profit.
Travel, Shipping, and Logistics
It’s easy to fail to account for those “micro-expenses,” but they add up. They might include site-visit parking, printing sets of materials, and small-item shipping costs. Individually, they may not seem like much, but they can add up to thousands over a $2M project. If you aren’t taking them into account when billing for your projects, this can be a profit leak.
It’s valuable to learn from high-performing firms, and you will find that they do not just “pass through” travel costs. Once again, there is time involved―time that involves the client’s project. You will find that high-performing teams apply a coordination fee for the time spent booking, managing, and executing travel for the team. Understand that someone will need to pay for the time spent, and if not billed to the client, you will be absorbing the cost of the time spent.
Your firm is acting as a financial shield between your client and the costs and logistics around shipping―particularly during times of supply chain instability. If you aren’t adding interior design procurement management fees to freight and storage, you are assuming massive logistical risk for free.
Scope Creep
Scope creep is a tax on your time freedom. Designers (rightly) get frustrated when projects that should be finished keep dragging on because of “just one more small change”. The method with which your firm deals with changes is one of many items that need a process―a process that is clarified at the beginning of the project, for all parties.
Some challenges keep repeating themselves because expectations were not clearly set up front as to how changes affect the bottom line.
Effective communication about expectations of the client and the design firm needs to be addressed before the project ever starts. Clarify the time and budget considerations a change requires. Use kind, clear, and direct communication to issue an addendum for every scope change. Your ideal clients will respect your business savvy and professionalism.
Procurement Profitability
Some designers feel pressured to share their trade discounts to stay competitive. First of all, are your ideal clients the kind of people who will pinch every penny? And do you want clients who seek out the cheapest option, or the most qualified? Because if you compete on price, it’s a race to the bottom.
View your trade discount as the CEO of your firm―a firm that offers excellent service and products. Remind yourself that your trade discount is not something you are “gifting” your client. It is the revenue that finances your specialized procurement team that can find and deliver pieces effortlessly. This efficiency is part of what makes your firm stand out in the business and attracts your ideal clients.
Yet still, many designers see this discount as a way to build goodwill with clients. Unfortunately, it just ends up being a source of profit leak.
Technology
Is your firm up to date with its technology? Are you using a cobbled-together tech stack that requires your team to manually enter expenses multiple times? Remember, time is money. Double-entry and systems that don’t talk to each other are costing you money and do not represent a firm that is professional and competitive.
Incorporate automated systems that capture shipping fees and billable minutes in real-time. This type of system ensures that you do not leave money on the table because of a messy backend. It will relieve stress and worry and help increase your bottom line, along with your available time.
Building a Profitable Legacy
Scaling an interior design firm profitably happens only when your business is consistently and strategically profitable. Design your business with processes and procedures that allow operations to run smoothly without leaving money on the table.
Ready to stop the profit leaks? Take on the role of CEO of your business rather than trying to be everything to everyone. Your team and your clients will be appreciative of a well-run business, and you will appreciate profitable business growth.