Know the Value of Your Time!

It wasn’t long ago that we at Daniel House Club were on the road, pitching our business to investors. We had a comprehensive 30-page business plan with three years of projections and a well-polished pitch deck that beautifully summarized our vision. Yet, we kept getting asked, “how do you make money?”

That’s because investors know making money is a key aspect of any business. They’re not looking for anything overly complex. They want clarity that you know how you are going to leave with more than you put in. Maybe you’ve put lots of thought into your vision, mission, brand, and aesthetics, but have you considered how your design firm makes money?

Fortunately, answering this question isn’t that hard. First, consider what you’re selling. Typically, design firms sell their time and the products that go into their projects. So, that’s it, the money from those sales is what you make, right?

Well, not quite – the underlying question is really “what money do you get to keep?” Now that we know how money comes in the door, we have to recognize the money going out to make that possible. To do this, we have to look at gross profit:

To have anything to take home at the end of the day, you need to make sure this number is high enough to support your remaining business costs.

What does that actually look like for your business?

To find a value that represents your cost of services sold, you’ll need to answer the following questions:

1) Your billing rate

2) Number of billable hours*

3) Cost of each hour billed**

If you’re just starting, you’ll have to do a little guesswork here. Otherwise, you can review your historical data to come up with more exact numbers.

See this in action with our assumptions:

1)Billing rate: 150/hour

2)Number of hours billed: 1,248*

3)Cost of hours billed: $55/hour**

Using our numbers and relying only on selling your services, we’ve arrived at the following gross profit:

gross margin applied to interior design

See this as a percentage or as GROSS PROFIT MARGIN (helps you know what percent you can spend on your business):

gross margin as a percentage

But all this has only considered the cost of your services, what about furniture sales?

Calculating gross margin on furniture sales can be simple if you have access to consistent pricing from the vendors you want to specify. We will calculate our assumptions using the pricing available to you as a Daniel House Club Pro Member (40% off).

Before we can go further, you’ll need to determine your pricing model. Historically, this model has been an approximately 30% markup on all goods sold, but we advise you to consider discount sharing as an alternative.

Let’s assume you want to provide your client a 10% discount from retail. To do this, you will share 25% of your 40% DHC Pro discount. Say you have an item that retails for $100.00, and let’s find your profit margin:

interior design math If you did the same math with a traditional 30% markup, your margin would only be 23%. It’s best for you to be discount sharing.

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YOUR HOURS & WHAT THEY COST YOU

If you did the same math with a traditional 30% markup, your margin would only be 23%. It’s best for you to be discount sharing.

*You’re not going to be able to bill all 2,080 work hours in a year. Be realistic about how many project hours you can sell, and time required for admin work. Assume 60% billable hours. This gives you about 15 hours per week to work on marketing, accounting, vendor relations, and general admin.

**I arrived at this by dividing $70,000 (a healthy salary for a designer) by 1,248. Remember, you actually work 2080 hours, but all of your pay will come from your billable hours. (Technically, each hour you work costs ~$33)

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Let’s Put It Together.

In our years as a design firm, we found that over 60% of our total sales came from furniture, meaning only about 40% came from our time billing. If you aren’t selling the furniture you specify to your clients, you are missing out on lots of potential revenue. Let’s put these numbers together and see what you should be making.

blended gross margine

This represents the percentage of money earned that can be reinvested in your business after you pay yourself and your furniture vendors. 45 cents of every dollar can go toward rent, utilities, computers, software, equipment, marketing, legal and accounting fees, and anything else it takes to run a business.

Now, you can set a salary goal for yourself and work backward to figure out how much money your business needs to bring in to reach your desired pay and continue being profitable. Next time you’re asked how you earn a living, you can answer with confidence.