Do You Understand Your Profit Margins?
Most interior designers that I've worked with understand the basics of their financials. They can figure out how much money is coming in and how much is going out. But it's surprising how many small business owners don't know their profit margins, especially since that's the KEY marker of how well you're REALLY doing! Running a design business is one thing, running a profitable one is another. Without a clear picture of your business financial health, everything you've worked for is at risk. Do you know what your profit margins are? If not, use this post as your review so you can make the most money possible!
What Is a Profit Margin?
Your profit margin shows you how well your business is performing and how much money you're making. It can be tempting to see your income as the best measure of your business, but it is NOT. Basically all you have to do to calculate it is to subtract your company’s expenses from its total revenue. So for example, let's say you charged $1,000 for a design consultation and you had expenses of $100 on that project. You would subtract $100 from $1,000 for a total of $900. Then, for your margin percentage, you divide that $900 by the total income ($1,000) to show that that specific project gave you a 90% profit margin, which is FABULOUS. Of course most design projects don't yield that kind of margin, but that example gave me easy math to work with. 🎉
Why Should I Care?
You will never be truly profitable if you aren't paying attention to the profit margins on every one of your projects and your services. I once worked through the financials of another designer who thought she was doing fantastically. She was making A LOT of money, but she wasn't paying attention to how much it was really costing her to run her business. When we figured her profit margin, it was literally 6%. She wasn't making any money at all - it was all smoke and mirrors. You aren't doing this just for fun, you need to make money to have a REAL business. And I know you want to make as much money as possible, right?! So this is a really key calculation for you and your company.
How Do I Use the Info?
I suggest that you work out your overall profit margin for your company, but you should also calculate what that number is for every project and every service. WHY? Because it will show you where you're doing well and where there are problems. For example, you might find that your overall profit margin for full-service design is 35%, but on one project it was actually 20%. You want to know why - did you spend more than you should have? Did it take many more hours? Were there hiccups? And on the other side of the coin, if you have one service you offer that has a profit margin of 80%, you may want to focus your marketing on that service in order to make more money. Knowing your margins helps you rework your business to be far more profitable.
How Can I Improve My Profit Margins?
Now that you know the calculation for profit margins, it should be pretty easy for you to answer this question! You either have to raise your prices or cut your expenses – or both! But, you can also find issues like I mentioned above and adjust how you're working so you get more money out of each job. For example, you might look at that 20% job and realize that you had an employee who was posting far more hours than the job should have taken. That's something you can address to avoid the problem on future projects!
Another way to improve your profit margins is to make sure your business is running as efficiently and effectively as possible! That means systems and procedures that are tight and can be used over and over again. Download my FREE Return on Interiors Sample Pack to see how my ROI system can help you have a better and more profitable business!