You’re celebrating that your firm just reached $2M in revenue. But then why does your bank account still feel like it did at $800K? If this sounds familiar, you are not alone. It’s not unusual for designers to confuse revenue with profit. This can lead to designers being revenue-rich but profit-poor.
The challenge here is to build a successful and sustainable business. To be sustainable, you need more than a business that is just earning money. You need a business that makes a profit. Be careful not to confuse revenue with profit. Revenue is a “vanity metric”. It is what you bring to your firm in the form of sales. But the “sanity metric” is the key – and that’s the Net Profit. Net Profit is the bottom line – how much of that revenue you get to keep once all expenses are paid, including payroll.
Scaling your business without focusing on profit margins can lead to a studio owner whose business is slipping and unstable. Whereas if you put your focus on profit margins, you can turn interior design from a small business into a powerhouse of the industry.
Revenue: The Fuel, Not the Destination
First of all, you need to be clear about these terms. Revenue is the total volume of business coming through your firm. Designers often obsess over revenue rather than paying attention to profit. Profit is how much money is left over once you subtract your expenses from your revenue. Profit helps pay for things that expand your business, allowing you to scale rather than just maintain. High revenue numbers may give you external validation, giving you a high rank in the industry, and all of that may stroke your ego. But as we often hear, the numbers don’t lie.
You may have that $2M or higher of revenue, but how much of that was true profit? You might be surprised to find out how many high-revenue designers do not have the profit you would expect. After all, increased revenue often increases the complexity of running the business. That means the overhead and team size will most likely need to increase. If not managed, that can decrease your net profit drastically.
Net Profit: The Key to Financial Freedom
It’s important to understand that there are two kinds of profit – gross and net. Net Profit is what you have left once you have paid yourself a salary or draw. When you set your annual financial goals, keep that in mind. Without doing that, you are not being accurate regarding the true profitability of your firm. If you do not take a salary or a draw, you are not running a business – you are working at a hobby, and not a profitable one.
Aim for a specific net profit percentage, rather than trying to chase a $5M revenue goal. Your net profit goal is essential for you to determine your fee structure. It is not just a number you pull out of the sky. This process is called bottom-up budgeting. That $5M revenue goal may sound appealing or impressive, but increasing your net profit will be even more impactful. By approaching your budgeting in this way and aiming for a specific net profit, you are planning for your financial freedom and the ability to reward your team fairly, all without fear of failure.
High Revenue Often Masks Low Profit
High profit often comes at the expense of your bottom-line revenue – your Net Profit. How does this happen?
Team Bottleneck
Often, designers ignore the fact that adding key team members can actually help you increase your profitability despite adding greater expenses. You may say you can’t afford the time to hire and train – when the financial truth is that you can’t afford NOT to. That doesn’t mean it’s easy. You need to hire the right team members so that they do not drain your resources. Train yourself and have processes so you can be effective in hiring and onboarding team members.
Complexity Chaos
Chasing high revenue may cause you to work with non-ideal clients or take on more projects than you can handle. Though seemingly high-revenue, those clients may end up costing you money. You absorb the costs of time spent but not included in the original bid. You are constantly putting out fires that cost you time and money. The project ends up having less clarity than you originally were led to believe. All of this drains money from your Net Profit in subtle ways through unbilled hours and slow burnout.
Scope Creep
Most designers are familiar with scope creep. How many times have you heard “I just have one more little change”? And how many times have you not charged for the additional time involved? A very clear contract, along with reviewing the contract with the client, can help you avoid this problem. Clarify at the very beginning what the charge will be for changes added during the project. Then the additional charges accrued from changes will not be a surprise – nor should you be expected to absorb them. This is about the profit you lose by saying yes to “one more little change” without charging the client for your time. Added up over many projects, you’re losing a lot of money.
The Capacity-Revenue Gap
It’s important to understand how much your team can handle. Many designers, often while chasing that high revenue, will take on more than their team can produce. This challenge creates a drop in quality where mistakes increase, and promises are not kept. Or, you push your team too far with constant overtime, and start to lose morale. You end up trying to juggle unsuccessfully and trying to put out fires just to stay afloat. Be clear about what your team can handle.
Shifting the Strategy From Growing to Scaling
Understand the difference between growing and scaling your business and recognize when it’s time to move from growth to growth at scale. Growth in business means you are increasing your revenue equally as quickly as you are adding resources to enable that increase. That may involve adding team members, equipment, location, etc.
Scaling a business happens when you are adding revenue at a faster rate than you are taking on new expenses. You may spend money on new marketing automation tools, which help you be more efficient while reaching a larger number of ideal clients. So, you have spent less than what that investment brought in revenue. You didn’t just grow; you grew at scale.
Pricing for Mastery
The industry average for net profit in design businesses is around 3%. But top-performing firms aim for 14-15%. The difference often involves a few key choices made regarding pricing, margins, and operations. Before you decide on what pricing model you want, you must have the confidence to back it up. Have confidence in the fact that your time, talent, and intellectual property have monetary value. Then adopt pricing structures that relate to that value and support profitability and growth.
Rather than adopting one type of pricing for all projects, consider a business model that scales with structure. Be sure you are building in fees that protect your time, including time for non-design tasks. That can include travel, sourcing, and project management – all of which need to be included in your pricing.
In scaling your business, you should be making decisions based on asking “What’s next?” for profit, not just “What if I get one more client?” Remember, you are the CEO of your business, and you need to have that mindset.
Diagnostic: Are You Chasing the Right Number?
- The Test: What would it look like if you doubled your revenue tomorrow? Could your team and the business itself handle it? Would your stress level double or your profit double? What can you do to grow at scale? Identify what would be necessary – such as expanding your team, updating equipment, etc.
- Internal vs. External Validation: What is the vision you have for your business? Is it the safety and success of internal business health and increased Net Profit? Or is it the lure of external recognition? You might be surprised at the number of seemingly successful businesses whose profitability is not stable, but is still appearing on magazine covers. Wouldn’t you rather have the accolades of your ideal clients who are sharing those accolades with prospective new ideal clients?
- The CEO Shift: Because most designers love designing, it can be hard for them to realize that to grow their business, they must actually do less design. You become the CEO of your business. That means taking full ownership and responsibility for all parts of the company, including leadership, decision-making, and strategic planning. You are not only managing day-to-day operations, but you also need to be focused on long-term growth and the success of your firm by developing an effective team and effectively solving problems.
- Designing for an Exit: Building a profitable business is not only an advantage for the immediate bottom line but also for the future of your business. Once you have moved from growing to scaling your business and approach budgeting to aim for a specific net profit, you can start thinking about the “invisible ideal client”. Too many designers ignore the value their business can provide for their future. Why build a profitable business and then, when you decide to retire, just close your doors and walk away? Instead, in the 5-10 year period prior to when you would like to retire, begin to identify the “ideal client” who might eventually purchase your firm. It might be a member of your team, another designer, etc. If you plan ahead, it allows you the time to identify the characteristics of that ideal buyer for your firm. Just as you evaluate who your ideal design clients are, so should you evaluate who might purchase your firm, and then prepare a plan.
Building a Profitable Legacy
It’s time to act and focus on growing your bottom line.
Create a vision that focuses on building a business that will create a profitable legacy. Your future will definitely thank you. Acknowledge that it’s time to stop reinventing the wheel. Instead, create a plan to start tracking your net profit goals with the same passion as your revenue.
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