How to Easily Set Reachable Money Goals in Your Interior Design Firm
You have heard it said before that you get what you inspect, not what you expect. Or maybe you have heard this quote, “What’s measured improves,” by Peter Drucker. Both are true. What we focus on expands – so not only the object of our focus, but the way we see it.
I am a firm believer in setting money goals – or financial goals. We may even use words such as financial benchmarks or even financial KPIs (key performance indicators) interchangeably with financial or money goals. No matter what you want to call it, we need to create a goal number that we are trying to reach that supports the business we are creating.
And I wish I could tell you it is only one number, but for me, it isn’t. We are only going to look at some of the financial KPIs today, but there are many other numbers in a firm that need to be managed. When you leverage your business finances, you will see an increase in your interior design profits.
If we were to go from top to bottom looking at an income statement (or Profit and Loss statement affectionately called a P and L) there are 5 numbers that I like to look at every month to set yearly and monthly goals for.
Total Income
When we create our financial goals for the year, we always set a financial income or sales goal. This is the total amount of money that we expect to come into our company. It can be for both product and services. Some of my clients derive this number first from historical data as well as marketing and growth plans. So, they may plan for a 10-20% increase in total sales from the prior year. If their income was $100,000 and they wanted to increase it 20%, then the new year sales goal would be $120,000. For businesses that are newer or who are looking for the number of sales to support their start or growth plans, they may come at this number from the other direction. Meaning, bottom-up financials. In that case, we would add up the business financial numbers that support the business including salaries, profit, and expenses then create a sales goal to sustain that work. In either case, having a number that you are reaching for allows you to break it down into daily, weekly, monthly, or quarterly goals. This immediately makes this BIG goal so much more attainable. Because let’s be honest with ourselves, this is usually a number that can make us gulp sometimes.
Within the Total income category, there may be two further distinctions of income: product income and service income. If you are doing detailed planning, then planning out how much of your total income is going to be from product sales versus some type of service labor can be very helpful. Knowing the separation of these two income streams will also allow for better analysis going forward.
Your first Financial KPI is total sales, and you can break it into 2 sub KPIs for product and service if you prefer.
Cost of Goods Sold
Working our way down the P and L, this number comes next in the big categories of income and expenses. Cost of Goods Sold or Cost of Sale is the number that pertains to the product or service that is directly related to the client’s work. In essence, this is the grouping of products such as case goods, upholstery, lighting, as well as any subcontract work that is client facing such as trades or having drawings done, etc. For those that are job costing, your billable hours may also show up in this category.
No matter what you retain here, we need to have a goal for this number and look at it in two ways. One as a cost to the sale – meaning – When we sell to a client, do we have a target purchasing budget. This purchasing budget will flow through to the income and the COGS accounts. We also need to look at this number as a percentage of the sale.
You have heard it many times on this podcast and in my training, our aim, if product is a large portion of our sales strategy, is for COGS to be 40-60% of total income. We can even break this down to see if COGS is 40-60% of the Sales price of the product without any services or design income. No matter how you set this goal, it is one to be very aware of. This KPI is influenced by your sales approach to the product, by the amount you are creating in profit on the product sale either by managing markup or margin on the product. This COGS number also directly influences how much money is left to run your company on as we are going to see next when we look at Gross Profit.
Gross Profit
Gross Profit matters more to me than total sales. This is THE KPI to start with in my opinion. Why – because this is the number that is needed to know if I have enough to run my company. This is the number that produces the money to pay my staff, my rent, my employees, marketing, etc. If I don’t have enough Gross Profit to pay for everything needed in the running of my company, there is a problem.
We need to know this as a number and as a percentage of Total Income, just like we do for COGS. In a future episode, we will be looking at creating a stress test for your financial plan. It does us no good to create a plan that when stressed falls apart.
When you have this gross profit number, see what is needed month to month for the running of your business. It will be important that you not only manage to the yearly needs, but to the monthly needs to keep you going.
Expenses
Ok. This is where we eat up that gross profit we just created if we are not careful. I like to follow the percentages in Profit First for setting expense goals. These are created based on the amount of gross profit or real revenue. For a business whose gross profit is $250k or below, the expenses should be 30% if in a healthy range. For a business whose gross profit is 250-500k the expenses should be about 40% of gross profit, and for a business with gross profit in the $500-$1m range, expenses increase to 50% of gross profit.
You can quickly see how it costs more to run a bigger firm. These are starting percentages, and they are attained by being very clear in your decision making about where money will be spent in your business.
Here are the two areas that I see being overspent all the time. First is payroll. I see businesses come to me with a gross profit of $150k or less with 3 people hired. Honestly, that business cannot afford those people. Why? Because usually the owner is not being paid at all or not being paid well. It is usually better for a business making a gross profit of $150k or under to use contract or part time resources to manage through the work. Until we get gross profits in the $250k range, hiring anyone full time is at the expense of the owner’s pay. If this is a choice you are making, then make it with eyes wide open.
The second area that I see as an expense suck is rent. These 3–5-year contracts can kill a business when you add up all the costs associated with moving outside of your home. I am not saying don’t do it – but do it with the foreknowledge that by moving out of your home and into a rented space it is going to cost you more than just the rent. Just like home ownership. The costs are more than the mortgage. My goal is for you to not spend more than 8% of your gross profit on your rent. Of course, the lower you get it, the better off you will be. A healthy range estimate is 6-8% of your gross profit.
Keep this in mind – every expense dollar spent is a dollar you are not being paid. I am not suggesting you go cheap in your business, but usually what I see is the other side of it. Employees being paid well, great environment, lunches, and fun things for the team (when we could do that) and little to no pay for the owner or pay not being commiserate with the work and risk. Imagine seeing a company that is making over $1M in sales and the owner is making maybe $40k a year. It happens. And we need to guard against it by setting KPIs for how much we will spend in expenses overall and in each category.
Net Profit
Of course, this is a favorite KPI of mine. Net Profit. This is the money that allows the business to be sustainable over time. We will use these funds to pay the owner either the equivalent of a salary or in distributions. We will use it to cover bonuses for our team members. We will use a large portion to cover the taxes on the profits and for the owner. We will use this money to fund our rainy-day fund, so we are not cash strapped. We will use the money to invest in the company’s future growth. We will use the money to be our own bank, so we don’t need outside assistance to float our cash. This number matters. This is our retirement money.
And if we are not watching, calculating, and planning along the way, it becomes just the number that shakes out, instead of the number planned for. I want you to create a KPI – an indicator – for this number. What does it need to be to support you, the owner, and the company? Then create plans to attain it.
None of these KPIs do us any good if we are not willing to create an environment for them to be attained. Before we can even manage to these numbers, we need to know what they are, if they are attainable, and have clear decision making in our firms that allow us to know what to do and how to do it to get what we need. Management comes after that.
Look at your numbers. Even if we are in Q1 or Q2. Look at them. Make a clear decision to set numbers and percentages for just these 5 areas that will serve your company plans for the year. Then make plans on what needs to be done – or not done – to reach them.
On our next blog, we will look at how to manage to these KPIs or money goals. Be on the lookout for Part 2 of the conversation.
And here is a good reminder for us all. It does not matter what size our business is. Large, small, somewhere in between. It does not matter if we are new at this or mature in running a business. It does not matter whether we got it all wrong or got it all right or are back and forth swinging like a pendulum.
What matters is that we stop right now and make a choice to be profitable. Make a choice to watch our financial numbers. Make a choice to do better now that we know better. Today matters. Every day matters.
Make the choice to be profitable.
If all of this feels overwhelming, there are two areas of help you can get. One, you can get myfinancial courses on my website: Pricing Without Emotion®, Understanding Your Financial®, and Master Your Profit®. You can purchase these individually or in a bundle. If you want deeper help with your growing firm, you can also work with me in a coaching relationship. Look at the Work With Me page on my website and fill out theDiscovery form. This information can be found at www.scarletthreadconsulting.com . I offer customized solutions for interior design firms, and I would love to guide you in some way to maximize your profitability. Because I can’t say it enough, profit doesn’t happen by accident.