Do You Know Your Profit Margins?
I know. Chatting about profit margins is so exciting! Ok, I jest. But, the end of the year is coming sooner than you think and I want you to get in the best mindset to review your business for the year!
What are Profit margins?
Profit margins are confusing! Often, designers think that they're doing well in business if they have money coming in, they have clients, and they can cover their expenses. But what those designers may not understand is that they aren't actually making money at all! That's where knowing your margins is critical.
I know you know this, but just to review - your profit margin is the percentage of money left over after you deduct expenses from your income. I know I’ve said this before, but the big eye -opening moment for me was when I realized that charging for my design consulting time is almost 90% profit—and my margins on selling product are much smaller.
I’m not saying to stop selling furnishings! But, I do mean that you should pay attention to the products that you can charge more for, and that bring in a higher margin. Selling pieces that are custom or ones that your clients can't find anywhere else is a smart way to make more money, for example.
You have to always know exactly how much money you're making AFTER you deduct your expenses. Otherwise, you're just fooling yourself into thinking that all of the money coming in is actually going into your pocket.
I remember sitting with a designer friend a few years ago when she did the math for the first time on her business income vs. expenses. She was completely shocked when she realized that her profit margin was only 6%. Basically, she was working for nothing, because she wasn't even paying herself a salary!
If you aren't paying yourself, or you aren't tracking every single hour in every single project, then you won't ever have an accurate picture of how your business is REALLY doing! You may think that you're doing really well if you're bringing in $500,000 a year. But if your expenses are $450,000, your profit margin is only 10%. A really good margin to shoot for is 40% or more.
The best way to stay on top of this, and to know exactly how much you're making, is to have a bookkeeper and to meet with her regularly. You need to do the math to understand exactly where you make the most money overall, and where you're wasting your time.
I know the financials are just not everyone's favorite part of the business. So my Return on Interiors system gives you everything you need to keep your company clicking along so you have more time to keep your eye on the financial ball. I have a great financials segment that will walk you through everything you need to know. AND the forms and systems I provide will help you be more profitable, too!