234: How to Manage My Money in My Firm 

Michele  00:00

Hello, my name is Michele, and you're listening to Profit is a Choice. Joining me on the podcast today is Kelcee with Elite Ops. She has been with us before and we are going to dig into some questions all around the financial aspects, kind of the manage your money, and my program. Thank you for sending in your questions and please continue to do that as we continue working through this series.

Every day, empowered entrepreneurs are taking ownership of their company financial health and enjoying the rewards of reduced stress and more creativity. With my background as a financial software developer, owner of multiple businesses, and the interior design, industry, educator, and speaker, I coach women in the interior design industry to increase their profits, regain ownership of their bottom line, and to have fun again in their business. Welcome to profit as a choice. Hey, Kelcee, welcome back to the podcast.

Kelcee Sparks  01:10

Hey, Michele, thanks for having me again.

Michele  01:11

You're welcome. We had such a good time with you asking questions before that we decided to do a couple more podcasts answering some of the questions because we have so many that are asked and that are sent in. A lot of times, I'm answering these one-on-one to the people that are asking them, but we decided to kind of pull them together and compile them and do it around the five pillars of the Aim with Intent methodology. For anybody new to the methodology that I coach under it is a solid foundation, create with intent and then align your team, ignite your process, and manage your money. It's kind of the five basic building blocks, if you will, of growing and scaling a business, a firm foundation, intention about what you're going to do, and then using the levers of people, process, and profits as you go along that growth pattern. You have pulled together some of the questions that kind of fit under the financial piece, that manage your money piece, that you're going to focus on asking today. We'll answer those and then we'll also in the show notes have a link for those of you that have questions right after for those that are listening that may spark another question. Send it in, and we'll do our best to get everything answered as you have it. I'm not necessarily as excited about these sometimes, because I'm like, oh, man, what is she going to say? But I think I'm ready, so go ahead!

Kelcee Sparks  02:53

Perfect. I tried to group them for you so at least you're talking about similar things along the way. But one of the most common questions that we get for you is about KPIs. Designers are really wanting to know how they know which ones they should be measuring and how they identify them for their business, is there a set that fits all design firms, or how do they determine, uniquely for them, what to choose and measure?

Michele  03:19

We'll have to look up the podcast, I don't remember the number Kelcee, but we have one that I did that was just on KPIs, and we have one on how to set them, so we'll link some of those as part of the answer. I'm going to take one step back because sometimes people don't know what a KPI is. And a KPI is a key performance indicator. What that means is it is something that you are measuring towards that is going to give you information about performance or what's happening for something that's really important. Key meaning really important, performance is something that is happening, and indicator which means measurement. The net of that is how do we measure what matters. We don't want to just measure as we could get into oblivion with measuring. We can measure to measure to measure to measure, right? You see that all the time as well. Or sometimes they're measuring because we are told we're supposed to. Instead, what I like to say is, what are the key things that we need to measure for a quarter? I like to measure things usually for at least a quarter just to kind of see what's happening.

From a financial standpoint, the measurements that I would say are most important are going to be things like what are our revenue percentages and numbers where revenue is 100%? What is the revenue coming in? And then maybe where is it coming in? If you have multiple income streams, you may be looking at that. Every month, I'm doing a quick review such as what is my revenue, what is the percentage and then the number of cost of goods, gross profit, expenses, and net profit, that's just a basic that I'm always looking at. If you're doing sales, some of you may be looking at what is the cost for a lead. How many people am I reaching out to? That's more on the marketing side, but it's also tied into the financials. We're going to sometimes be looking at what are our billable hours. That's another big indicator that we're looking at. What was our goal for the number of billable hours and did we reach that? And how many did each person reach? And are they meeting the percentages that we built the business plan on them meeting? Maybe some of you have a key performance index or number about how many installs we’re having done in a month? Or what was our project profitability? There are a lot of numbers around that. It can be a lot, but we can't measure everything all the time. And if we do it needs to be done for us. We can always talk about this a little bit later, but that's one of the reasons that we built Metrique Solutions, which is the software platform that I would love for everybody to try.

6:10 The reason that we built Metrique Solutions was simply so that it could do a lot of that analysis for you and give you those set your KPIs, and it tells you, here's where you are, here's where you said you wanted to be, here's an up arrow or down arrow to tell you if you made it, it's that direct and in your face. That allows you to measure something else, where you have to actually analyze it because these are done for you. That's what I would say. The way that you determine what's most important, is by asking yourself, what are the goals that our firm has for this quarter? And what are the indicators that I can look at to see if we're going to meet them. If the quarter is focused on marketing, then maybe you have marketing KPIs, if it's focused on employee retention, maybe you're looking at some number that relates to that. So just saying, what are we focusing on this month? Or where are we at most risk this month? How do we build something to measure around that?

Kelcee Sparks  07:07

Awesome. I think that's super helpful and I actually want to build on what you said just a little bit, because a second question and maybe a third question that we get often is so I've decided, now, how much historical data or how much future data do I need to collect to figure out how I'm performing? If I've collected it for one month, I'm doing great. Should I still measure it, or should I still continue to look at it? How do I reevaluate that? How do I know when to change? What I'm measuring? What to do when and how often to look at it?

Michele  07:42

I would say that that could vary based on what it is you're measuring. For example, if I am trying to measure growth year over year, then I'm going to need multiple years of historical data to see that. If I am trying to make some decisions that are more quickly implemented, then a couple of weeks or a couple of months may give me that information. If I am looking at something that is more cyclical in nature, then I may be needing to measure, and I'm giving you a weird example, but let's say that our sales happen primarily during the school year. And we want to measure what does the fall semester look like compared to the spring semester of a school year because people take summer off. If we were to break the year into three sections, you've got spring, winter, and summer, or fall/winter. And you look at those three things. I may have to have multiple of those to be able to see it. If we are making those tiny changes, for example, billable hours, you can measure that data weeks at a time, days at a time if you say we need to have X amount per day. I think it does vary based on what it is you're trying to do and how quickly you see change.

The other thing I would say is not only looking historically at the data to say how long have I been needing to measure this or looking at it, but how much going forward do I need to check it? Because while you may not be measuring it all the time consistently going forward, you may have to have checkpoints like once a quarter I'm going to pop in to see what this number looks like, even if I'm not going to watch it daily. Think about the way some of us might check the stock market. Some of us may watch certain ticker symbols daily because we know something's happening there or there's something happening in that particular market. And then some of us may say I'm only going to check it quarterly when I do a quarterly investment. Some of you are only going to check it once a year when your financial person speaks and so we weren't going to look at it at all. I hate to have the answer to everything. It varies. It varies, but it really does. And I think what that shows us is, there are important things that we need to look at that based on where we are in our business, whether we're just starting, whether we're maintaining, whether we're growing, that lens and importance to what we're looking at how often we look at it, what are we doing to initiate change in that area? If I'm not looking to change something, chances are, I'm not going to check on it as often. But if it's an area where we are trying to exact change, we are building out SOPs or changing SOPs, or changing delivery systems doing something, I'm going to measure it more.

Kelcee Sparks  10:45

I think that those are the two most common things we hear about key performance indicators, how do we know what to measure and how often do we measure? We're going to switch gears now to how much do I charge? How do I know if I'm charging enough? This is another huge group of questions that we receive from design firm owners. And just to kind of sum it up for you, how do I know if I'm charging enough since it's hard to predict if my projects will be profitable? How would you respond to those types of questions?

Michele  11:18

I see that question come up the same way you do, I get asked that a lot. What does enough mean? We could go all existential, what does enough even mean? And I think there are multiple ways, again, it varies to define what is enough, but I'm going to give you what I would consider to be a very basic definition of am I charging enough? I think, charging enough, really means am I satisfying the needs of the company, am I able to keep the expenses paid for the needs of the business, not necessarily all the wants and the desires, we'll talk about that in a minute. But am I able to meet the general operating expense needs of the company? Can I pay the people, can keep the lights on? Can I keep my internet connection? My phone, can I drive back and forth to the office, then I'm looking at can I pay my people. Am I covering the operating expenses and my covering the people expenses? Am I able to provide the support and the service that I'm selling in a way that brings ease and joy? If I am able to do that, and if I can provide a profit in the company, so that the company doesn't get down to zero, so that there is money in the bank to kind of weather a storm, to be able to get us through to not feel stressed at night, then we're charging enough. That's the basic answer can I cover.

If you look top-down from a P&L statement, your revenue, am I charging enough, which is “what's going to show up in revenue, to cover the cost of goods, to have a healthy gross profit that can pay for the company and pay for the people and have a net profit that allows me to reinvest back into the business to do it again” then you're charging enough. Now charging enough and charging well could be a difference. We also want to look at are we charging for growth. Are we charging in a way that allows us to not just manage to a sum zero, but are we charging in a way that’s still fair and reasonable? That's the caveat that I would put on this. For example, would people pay more? Because sometimes people think about charging enough and they're really saying, will people pay more? That's a different question than Am I charging enough? So really kind of parsing out what that question is asking.

Charging enough keeps everything paid, but kind of status quo. Charging to grow, or creating a pricing structure, which allows for growth and reinvestment in the firm is a different thing. What that means is having a very clear plan on how do I have great buying power from a cost of goods perspective, so that I have what is the gross profit that I need to run the firm, not just to meet the demands of today, but to save enough at the end of the day, to give bonuses, and to reinvest in some of the next big goals for the future.

This is where having that strategic plan for me is crucial. Because otherwise, if we don't have it, we're just kind of working status quo and just assuming that whatever happens is what happens. When we have that plan it is saying not only here's what I need to happen this year, but these are the plans for the next one, two or three years, or however far out you created that plan. And there is going to be money necessary to do those. So, if every year is only taking care of itself, there's no money to do anything in the future? And using that, then ask, Does my pricing plan align with my growth plan? That's the bigger question. Not just Am I charging enough? Charging enough for who? For what? For when? It may be that I'm charging enough for this year, but I'm not charging enough for where I want to go. Then we also have to look at the balance of what am I charging versus what am I giving. What are they getting? And enough for my business might not be enough for what their expectations are, so now we have to align. Am I charging enough to do what the business needs to do, but am I providing the product and service that they expect for the amount they're paying? It's kind of triangular in nature.

Kelcee Sparks  15:46

To add to that, one of the things that they often say is, I don't know if my projects are going to be profitable until the end. How should I be charging for these to know that? Should it be hourly? Should it be a flat fee? What are the benefits of each? How do I decide? I want my projects to be profitable, so what do I do? That's a pretty big question, but how can you respond to that?

Michele  16:12

I think we have to go back to say, what is my plan for profitability at the project level, and thereby at the company level? To even know what profitability might look like and is it enough? Number one, we should never be waiting to the end to figure that out. We should have a plan for what it should be and then we build our time and our money based on that plan. I'm going to start there to answer it, I may have to get you to repeat a piece of the question in a minute, but I want to start there. Because, again, what I see a lot of is working on a project, and then checking the finances at the end, versus going into a project and saying on this project, we have built the pricing model with the understanding that it is going to bring in and generate X amount in design fees, X amount in architecture fees, X amount in product purchase fees, whatever that might be, and here's what our gross profit should be based on the way that we're pricing these things, and how much time we think it's going to take. This should be our gross profit. And then out of that gross profit, here are the expenses if we were to go further into project profitability. There’s that top level of project profitability, but then what are the costs for employees, we can look at it at different levels of depth for project profitability, but what is it we are expecting? That's a piece that I will tell you that I'm going to say seven out of 10, it may even be higher, maybe eight or nine out of 10, don't do. They don't set up here's what my company has to do, and here's what the project has to do, and therefore I need to monitor it.

I was having a conversation with a design firm the other day, and they did everything by flat fee. Fine, they did it as a percentage of the project, X percentage of the project, here's what you owe me and this was going to take, but they never track their time and track their hours. And so by the time we're two years, they're feeling like we didn't get paid for this. Well, they didn’t get paid for it. But the challenge is, they didn't set aside the time that it was going to take to get that project done, so now everything feels like they're being taken from. They cannot figure out if they made money on it, because they never kept up with one of the spins of time. It's not just how much you get paid, but what did it cost you to earn that money. We're earning it in design time and design hours.

For us to figure out how to charge we first have to figure out a couple of things. What is it that we need to earn and do in the project? What are the resources we have available in time and money? And then how do we track that? Then we can take a step back and say if we're tracking it this way, what's the best way to charge for it number one so that we're charging in advance and not in arrears as much as possible. What that means is we're being paid in advance so that we can then pay our employees to do the work instead of chasing the dollars on the back end. Whether it's flat fee hourly, or whatever, it's about how do I get paid early and not get paid late. The second thing is, how do I how do I set this pricing plan so that it is advantageous for me the business owner but advantageous for the homeowner. Sometimes the flat fee is advantageous for the homeowner, because they're thinking to themselves, I know how to budget, I know how to plan. It can be scary, but they also can like that so we can leverage that. But what it means is if we tell them it's $20,000 for us to do A, B, and C, we need to know what it's going to cost us to do A, B, and C, because if it cost us $25,000 in time and resources to do it, and we don't know that upfront, we're losing $5,000 that we can't go back.

We also need to know when we're building flat fees, I call them kick-out clauses, what is it that kicks me out of the flat fee? Is it that you want me to go tailor-make a piece of furniture for you? Well, that's going to kick me out of that. Is it that you want me to go shopping for antiques, that's going to kick me out. Because those are not things that I can put in a box and do like this. Flat fees, you should have an idea of how you're going to spend every dime of that before you give it to the client. And if you don't know where every dollar goes, you don't know how that time is going to be spent then you need to halt and think about what you're doing. If I had all the inputs, anybody could do this, I could take the same project and price it three different ways. You could price its time and materials, you could price it a flat fee, you could price it as you're going, I guess four ways, or you could price it by square footage. It doesn't matter, you've got the same inputs, time and money are always going to be the inputs. So, it's really to me about do I fully understand what it's going to take to solve the problem. And then number two, how can I best message this, protect the company and protect the client?

Kelcee Sparks  21:35

I think that makes a lot of sense. I'm going to follow up with a quick question that I hear a lot about the difference between charging hourly on the back end and charging a flat fee at the beginning. We hear a lot of designers say I'm always more profitable when I charge hourly on the back end, but I have to meet payroll. What is your suggestion to manage that process if they choose that going forward?

Michele  22:06

I think some of that can be done in a couple of ways. You can still take a retainer upfront, and draw off of that retainer, which is money in advance to pay your people for that month, and then turn around and charge to put it back into the retainer for the next month.  So, you have if you will this bucket of money in advance from the homeowner, or the client that you are drawing off of, therefore you're not working with nothing and then billing. Because you know where this comes from. But it also comes down to, Kelcee, how great are people at billing. I'm seeing people when they get super busy, I've seen them two, three, and four months behind. I've seen some a year behind and billing a year behind in billing. I've got to tell you, if I got a bill from a Service Provider a year after the work was done, even if I owed it, I'm just going to be so blunt, it would piss me off. I would be angry that after the newness has worn off, after the excitement has worn off, yes, I owe that to you, but you must really suck as a business owner if you can't get me an invoice within a year.

That is bold, and that is brash and I'm sorry if it comes across that way. If anybody out there listening is stuck like that, you're my people, let me help you. It does not build a relationship for somebody to think oh my gosh, I'd really love to work with Michele again, she sends me a bill a year after it's happened. That's uncomfortable. And I know from those that I've supported that have got stuck in that situation, it is embarrassing, and you're going to get less than what you're invoicing because some people aren't going to pay it. The most beautiful way to do this is to bill as close to the time of service as you can possibly bill and the more that you can bill in advance and pull off of that advanced billing. Number one, the more that they're paying you upfront that the smaller amount that you've got to run with behind. You know, I hate to just be that bold when I say that, but it's just true. If I only saw it once, I wouldn't even bring it up, but I see this over and over. And it's usually because people get caught with a lot of work, they might have team members who quit or leave or high turnover of team members and they're honestly doing their best to just do what they can do to keep it afloat. And I honor that. But when you look at it from the client’s perspective, it doesn't bode well for longevity for you because that's when they can push back and go, I don't want to pay that. I don't want to pay that.

Kelcee Sparks  24:53

On the heels of that as it flows nicely into our next question because another thing that people say ask often if I want to predict my cash flow, I want to understand how much money I'm going to be making in three months so that I can manage my team higher if necessary. Are there tools that you suggest? What's a process that you teach your clients? Can you tell us a little bit more about predicting cash flow? And getting really clear on how to make decisions based on that?

Michele  25:23

So a couple of things. First, I would say, again, it's knowing your process. It's knowing this is how many hours we can build, this is capacity. We talk about that, how much capacity. What is the capacity of my team? What are the jobs that we have? You know, in most of our jobs, there's an overlap. It's not a start to finish, then take the next one start to finish. There's some overlap. It's knowing in your own firm; how much overlap you are allowing. I think about playing Double Dutch. That's kind of how it feels. Double Dutch, how much am I jumping between things? And how do I stack work? What is the capacity? It has to start there. Because if I understand the capacity and understand the team and understand even what our ability is to bring in, now I can start layering that with what is the work we have against the capacity that we have so I know what is even available to command. We have to start with the strategy and the mindset for what the workload looks like.

Then it's really about looking at your business, I believe, in cash and accrual. Looking at it in cash is only saying here's what's coming in and going out as what the bank says. Accrual is when we're putting these invoices into our QuickBooks, or Studio, or whatever our accounting software program is, here's what's coming in, here's what we're expecting to go out. You're putting the bills in as they come in. The more that we are capturing that information in our accounting system, the more we know our process, then we can start to watch it. And we can start to say it's going to cost me X amount in operating expenses next month. I know I've got to have that coming in, do I have the capacity to do that?

An adjunct to that is again, why we built Metrique Solutions because Metrique gives you some of that information. For example, we have in the newest release that is out, you can go in and do a billable capacity model. We have modeling tools, this is how many people,  we have if they're billing at this capacity, and this is how many hours they work over this many weeks how much money can they bring into the company? What does that look like if they were fully allocated for work, what can I expect our billable income to be from each person you see, for each person, and for the company? Then you can build a financial model in there that says we're building this model of how much money, kind of the questions earlier, we want to make money for this year and then for growth. This is what we need to bring in, this is kind of the cost of goods all the way down. We want to divide it out, how much money do we need to bring in now and we can go back and look at the billable model to see. Then when we're putting our money in every month, we're uploading those P&Ls and we're watching it, you can see where your cash is coming in and where your cash is going, and where it's allocated. Now you've kind of got this 360 picture and that's what I think is so important here, none of these are one-offs.

What I see in the industry is dealing with the questions that you've asked me as if they're one-off questions. How do I price? Not thinking about not just how do I price but how do I price and what am I expecting it to do now, what am I expecting it to do later, and what is the service that goes with it. And what is accountability? And what are the indicators? Every one of the things that you asked and that we get asked here all the time, they're all so interlaced and interconnected. And I think quite often we see people want to ask these as independent questions, not knowing that we have to ask all of it together to get the full picture to make it work. That's why you can look into some business models that can all price a different way. But if they've answered all of the surrounding questions, their business may be thriving, which is why you can't take one piece of what they've said and plug it into your business. Your business falls apart and you don't understand why. It’s because it's not a one-piece plug-and-play. It's an answer to all the questions, creating how I'm pricing is not standalone from my marketing plan. It is not standalone from my strategic plan. It’s not standalone from my employee plan. All of these things have to work in concert to get the business where it needs to go with as much ease as possible. They're not separate things, even if we have to answer them separately, at some point, we have to put our arms around the whole thing and look at it. And that's what I see missing the most is the 360 view. We focus on one thing, and we think it's the magic bullet and there's no one magic bullet.

Kelcee Sparks  30:19

Absolutely. I think that's why the approach you use with your clients works so well because it's never a one-and-done. It's always that let's understand all the pieces together, which I know so many of them have appreciated over the years. You mentioned Metrique a few times during this and it sounds like a lot of these questions can be supported by what it does. You mentioned the 30-day free code.

Michele  30:44

The 30-day free code is the number one, and then all lowercase mofree. The number one lowercase mofree for one month free. And we'll put that in the show notes. You know what your questions get me on like my soapbox and it's so funny because you know when I'm answering the one-off, you just kind of answered the one thing and move on. But when you start to see it collectively, you can talk about the bigger picture here. And the bigger picture is we all want to succeed. We're building these businesses to succeed and we all talk about the different definitions of success. The financial piece, it's interesting to me that you started with that today and I can understand why. We are profitability, we do talk about that. That is my number one thing. But it's a scary place. It's a scary place. It's scary when we haven't billed on time, it is scary when we don't know how to bill, and it’s scary if we bill correctly on time. Because we don't know how it's going to be taken.

This all has to be positioned. It's even scary right now, where we're seeing changes in the market and change in buying habits. We don't know how much we should have or not have. Back during COVID, I told people to have three months of expenses, I still think three months is the minimum. I don't mind people having a six-month backup plan at this point. I will tell you this, this is just me, I don't believe the government will have the money to bail us all out or to bail all the companies out again, I don't see that. And so, if we are always running our businesses to a zero-sum, I think we are running with a huge risk. You all know, I'm risk-averse. I am not the most risky person in the world, that's just not my deal. I think we all take risks by having our own companies.

If we're really trying to protect what we're building, we need three to six months of a cushion to carry operating expenses. If we start to see things go up and down, which also means we might need to start being careful how we spend money now. Make sure that you know that we are, maybe, outsourcing instead of hiring all these people. If we are not assured that we're going to have a good year or two worth of work for them, really think about the decisions that we're making, thinking about that longer-term plan, before we make some of these financial decisions. That's why choosing some things to look at, choosing some indicators, and getting into Metrique is less than an hour of work or less than one billed hour for almost everybody that would be listening. It is less than one billed hour a month for it to show you everything, why would we not have that data, and why would we not put it in our hands?  I can guarantee you that the majority of the listeners are not out there doing the math that we have done for you. And I know they've not done it and they need that number, they need the data that it's showing. It has Profit First built into it. I mean, it's got the things and so much power in one hour that they can have access to, that gives them the ability to then get that 360 of their financials to make those decisions. I just encourage anybody listening, first of all, I'm going to tell you to go run get Metrique, do the month free do it. We will make sure that you get in and get everything loaded. But second, to that, take the time to do the 360 on not just what am I charging for or how am I charging, but what am I expecting it to do. How does it fit into the running of my business? How does it fit into the marketing plan? How does it fit into my client plan? How do all these pieces fit together?

Kelcee Sparks  34:44

And I know that you are trying every day to continue to help design firm owners and creative business owners as much as you can. So obviously they can get in touch with you in multiple places. Can you share that with them here?

Michele  35:01

Sure. So I'm hanging out on Instagram at scarletthreadATL and also at Metrique Solutions. We’re on Facebook with Scarlet Thread Consulting and Metrique Solutions, and LinkedIn as Michele Williams. Then certainly the two websites Scarletthreadconsulting.com and Metriquesolutions.com and I would love to have a conversation with anybody who is listening, who thinks that they need to look at their financial health, maybe they just want to jump in and say I need a financial review. I will offer to do those and we have those and you can purchase a financial review to get somebody to look in and say, Hey, tell me what you see, how do these pieces fit together, or I need some of this planning done. We have financial courses that you can get online as a standalone. We also have some financial bundles, and coaching packages, if you're looking for just a financial package that you want to do. Or if you just want a one-off financial review, you can purchase one of those. But the place to start with any of those questions for anybody listening is to go to the Work With Me page on Scarletthreadconsulting.com and fill out a discovery form. Let's get together and talk about what your business needs and see how we can help you get there.

Kelcee Sparks  36:23

Well, thank you again, for sharing your brilliance, and your knowledge with all of us, we really appreciate it. And again, like Michele said at the beginning, if you have questions, we're going to put a form in the show notes, so please submit them and we will be continuing the series over the next few months.

Michele  36:40

That sounds amazing. Thank you, Kelcee, I think it's so important that we all are looking at profitability as certainly more than just the numbers. I know I say it from the beginning all the time, what we own we can change. And that profit doesn't happen by accident. It's kind of my outro every time and I say that because I want us to understand that we can affect the changes that we want to see by changing the course of our business, changing our SOPs, changing our minds, changing our work, changing our clients change, change, change allows us to get something different. So let’s all be committed to making the next right change for our business to create that profit. Profit is a Choice is proud to be part of the designnetwork.org where you can discover more design media reaching creative listeners. Thanks for listening and stay creative and business minded.