If I stopped you on the street and asked you, “how’s business?”, how would you answer? I know, it is a loaded question! Because we are running businesses, not hobbies, your answer runs deeper than “it’s good” or “we’re so busy”. Your profit margin determines the health of your business. Today, we’re getting down to brass tacks by defining what a profit margin is, how a good profit margin lends efficiency, and how you can achieve a robust profit margin.
WHAT IS A PROFIT MARGIN?
So glad you asked! Before you build out a strategy, you need to know what you are working towards. Plain and simple, a profit margin is a financial ratio that measures the percentage of profit earned by a company in relation to its revenue. Expressed as a percentage, it indicates how much profit the company makes for every dollar of revenue generated. (Business News Daily) The profit margin we should be most concerned about as business owners is gross profit margin: your overall gross revenue minus the cost of goods.
What is a “good” profit margin?
You’ve done the calculations, now it’s time to check the pulse and see if your profit margin is healthy. Every industry has an average profit margin you should be aware of to determine how your own business is performing. For a design firm, a healthy gross profit margin can be anywhere from 30-40%. (Logistis for Designers) The goal is a good gross profit margin, one that is high enough to keep the business sustainable. The lower the gross profit amount and thereby percentage, the more income is needed to run the business.
Why should YOU care about a healthy profit margin?
Simply put, profit margins are important because it detects how much of every revenue dollar is flowing to the bottom line. A profit margin can quickly determine any pricing problems (undercharging, ahem!) that may exist. If not identified quickly, pricing errors can create cash flow challenges and therefore threaten the ongoing existence of your entity…and that is an impending doom we do not want to face!
How do YOU make your design firm a high profit margin business?
While many businesses looking to grow focus their efforts on increasing sales, improving profit margins is an out-of-the-box way to drastically increase their profitability. By widening your profit margins, you can make more from every dollar of your gross revenue, without increasing your client roster or services.
Here are a few of my favorite and most impactful ways to increase your profit margins:
- Restrict the number of initial sessions: prospective clients can take up hours of your time with in-person creative brainstorming sessions before choosing to work with you. Let them know at the beginning of your engagement the price for the first session (or that the only complimentary onset time with you is the first call), and everything moving forward will have an associated fee. Pro-tip! If you have a questionnaire for prospective clients even before a discovery call, state the initial consultation charge there.
- Hire accountants who understand your business: as the interior designer, it is your job to focus on your craft: sourcing materials, customizing furnishings, attending site visits and implementing final installation…bringing your client’s vision for their spaces to life. Leave the numbers to the experts! An accountant who is well versed in the design field will navigate business concerns that you would not have learned about in design school. They will take on the backend financial burdens of your day-to-day activities: vendor payments, client invoices, credit card reconciliation, and the list goes on. Pro-tip! By request, my accountant sends me a custom monthly report (that I can actually understand) of income, cost of sales, sales tax owed, income tax and savings to put aside. Being able to read a report clearly will allow your financial literacy of your business to skyrocket.
3. Review your pricing strategies: if you have more tasks than you can handle but aren’t making enough money, you are not charging enough. Get comfortable knowing your worth and match your fees to your value add. If your clients abandon you solely because of pricing, they did not respect your expertise in the first place. Where do you start? The Circaphiles, 5 Ingredients in a Viable Pricing Strategy, of course. Pro-tip! Once you are working with a profitable venture, you can have more say over what projects you accept and how much you charge.
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