They say money can’t buy happiness, but this quote is often misused. Indeed, money cannot literally buy happiness. But money is the primary source of stress for Americans of all age groups, and many of life’s joys (things or experiences) can only be acquired with money. Not everyone needs a billion dollars, but an amount of income that lets you live comfortably and save for future joyous moments can make your life that much easier. In this article, we’ll explore the most critical financial metrics that every interior designer needs to know to bring the most joy into their life and business.
A variety of sources identify the two core motivators that drive our decisions as love and fear. Ensuring that you are making your financial decisions based on love rather than fear requires clarity about what brings you joy. By clarifying in writing the key part your future revenue can play in what brings you joy, you create a stronger desire to learn to make friends with your financials. Often, it is only the fear of the unknown that holds people back.
Financial Metrics to Track
Financial metrics are used to evaluate and assess the financial performance, health, and stability of your firm. These metrics are obtained from a company’s financial statements, such as the balance sheet, income statement, and cash flow statement. They are drivers for your business. A clear understanding of your finances will allow you to:
- Identify the types of projects that are the most profitable
- Understand the value of tracking your profitability, not just your revenue
- Make smart decisions about pricing your services
- Confidently plan for growth
- Increase your net profit so you take home more of what you earn
To plan for business success, there are certain financial metrics you should be tracking. As the CEO of your business, you don’t need to be an accountant, but you do need to understand where your business stands financially and how you got there. Then use that information to plan your future growth and success.
Income Statement
The Income Statement, or Profit & Loss (P&L) statement, shows whether your business is making a profit or a loss. It summarizes your revenues, costs, and expenses over a specific period (a month, a quarter, or a year). It includes the following:
- Revenue: Total income before expenses is taken out.
- Cost of Goods Sold (COGS): The cost to acquire or produce goods.
- Gross Profit: Income remaining after COGS is removed from revenue.
- Operating Expenses (Overhead): The ongoing costs of your business, like rent and payroll.
- Net Income: Profit or loss after deducting all expenses from revenue.
Balance Sheet
The Balance Sheet provides a snapshot of your firm’s financial position at a specific point in time. It shows what you own (assets), what you owe (liabilities), and your net worth (equity). Assets = Liabilities + Equity. The balance sheet reflects your firm’s financial strength. It indicates whether you can pay your short-term debts, if you have too much debt compared to equity, and if your assets are growing over time.
- Assets: This refers to what your business owns, including cash, accounts receivable (money owed to you by clients), inventory, and equipment.
- Liabilities: This is what your business owes to others, including accounts payable (money you owe to vendors), loans, and deferred revenue (client deposits).
- Equity: This is your stake in the business as an owner–your investment and retained earnings.
Cash Flow Statement
The Cash Flow Statement follows the movement of cash over a specific period, both into and out of your business. It is of major importance for recognizing how well you manage your cash flow. Your cash flow is the lifeblood of your business. Managing the fluctuations of your cash flow is key to keeping your firm afloat.
- Operating Activities: This is the cash flow from your principal business activities, such as design services, sales, and related expenses.
- Investing Activities: This would be cash flow from purchasing or selling long-term assets, like equipment or property.
- Financing Activities: This addresses cash flow from borrowing money, repaying debt, or raising equity.
The cash flow statement can help you predict or anticipate cash shortages, manage expenses, and make sure you have enough cash on hand to meet your obligations. Obviously, it is important to be sure you can cover payroll and payments to vendors. The cash flow statement can also alert you as to whether you need to improve your collection process.
Business History and Project Profitability
The writer-philosopher George Santayana is credited with the phrase: “Those who cannot remember the past are condemned to repeat it.” Understand and learn from your past. If you want different results, use the knowledge from your past to change your future results.
- What are the Average Values of your clients? You need to understand the monetary value of your clients, which includes:
- Average Annual Client Revenue
- How many clients do you work with?
- How many dollars of revenue or sales did you bring in last year?
- Divide 12 months of revenue by the number of clients to get your Average 12-Month Client Revenue
- What is the Average Lifetime Client Value?
- How many years do you typically work with a client?
- Average Annual Client Revenue multiplied by the typical years you work on a project equals the Average Lifetime Client Value. The time that you work with a specific client can vary wildly, so these numbers of just an estimate to help you budget.
- Average Annual Client Profit
- What was your Net Profit last year? This is what is left after all of your COGS (Cost of Goods Sold) and Overhead Expenses are paid.
- Average Annual Client Revenue
How much your clients are worth to your bottom line or net profit of your business is one of the most critical financial metrics you should track in your business. Revenue per client helps you calculate your revenue goal per year. But it is even more important to know what your profit is per client, as that is what pays you and your employees. It’s what pays for your children’s college, your retirement and vacations, or a new car.
How much revenue or gross sales have you produced over the life of your business? Those numbers are important as they give you a quick metric of how your business is doing. Understanding what it takes to be profitable guides you in deciding which clients to take and which you should not. Taking the wrong client will cost you money in the end.
So if you tend to cringe when you think of financial metrics, hopefully this overview might just help you start to fall in love with your financials. After all, just think about what life will look like if you can increase your net profit and take home more of what you earn. What if you keep building equity in your business so that you are building a sellable business if and when you decide to retire? Finally, if you focus on the value of your clients, you can build your business with ideal clients who will continue to add to your bottom line over the years.