I’m hoping you can help me figure out the best way to monitor the performance of my design business. I am fortunate to run a profitable company, but I find that I have to sift through so much financial information from my bookkeeper (who is amazing, by the way) that it is difficult to get a firm grasp on how we are actually doing. What should my next steps be?
Dear Information Overload,
First, I want to acknowledge that I am not an accountant nor a bookkeeper, so my advice may or may not be in accordance with what they would recommend. That said, I am a huge fan of the KISS principle—“Keep It Simple, Stupid”—when it comes to knowing how your design business is doing.
As any good statistician will tell you, you should seek the smallest sample set that will give you meaningful information. Otherwise, you face paralysis by analysis. Just because you can measure it does not mean it will help you understand your business any better. So while it might seem counterintuitive, I’d suggest that you start at the granular level and work your way out. Begin with target dates for any project—including each stage of a design, design completion, steps of production and ultimately installation. Time is money, so if time is slipping away, it is best to know when and where as early as possible, so that you can stop the clock.
Then, prior to any third-party analysis of your accounts, examine your cash flow. What monies have been taken in? What is expected, and when? If you have structured your projects to have payments match value delivery, they will match target dates, and you will know you are on track. For instance, if you negotiated a design fee, half of which was paid on engagement of your firm, with the other half due upon completion of the project, you will know you are on the right path if you collect this second payment soon after the date set for completion.
Now, on to production. Presuming you have received all monies in advance (please say you have), then it will just be a matter of paying attention to how you pour the water out of the watering can, so to speak. If you think of your production as watering a flower bed, you just need to monitor if you watered the roses, then the tulips, then the hydrangea when each needed attention. Of course, if you have to collect monies before every purchase, life becomes much more complicated, which is why it always makes sense to have a reservoir of funds to rely on. The good news is, most software management systems are designed to help monitor payments. The overarching effort remains the same, though: The right flowers need to be watered at the right time to maximize the beauty of the garden.
Project on time? Money flowing well? These two components should merit a weekly checkoff, and if you were kept abreast of only this information, you would be able to handle the majority of issues that might arise. But beyond that, you want to make sure you are making the kind of money your services deserve.
If you are on schedule and money is coming in, there’s little need to worry. However, since curiosity does what it does to the cat, make your life easy and zoom out after that weekly check-in on project status and cash flow. Ask your bookkeeper to assign a conservative breakeven number per month. If there are one-time payments that are meant to cover longer periods (for instance, markups on purchased items), then designate an expected time frame and divide the payment amount accordingly. So as not to drive yourself crazy, review your gross profit/loss quarterly—there’s too much fluctuation in any given month. If you are hitting 35 to 50 percent, you are doing just fine.
Oh, and for those of you who thought I forgot about hourly billing, I did not. I only wanted you to read the entire column before I gave you heart palpitations. So consider this a postscript: When it comes to hours, the only thing you should be concerned with is utility, far more than rate and amount. Given a 40-hour workweek, 50 weeks a year, a perfect month would be 167 hours billed. If you and your team are coming in less than 65 percent of those hours (e.g., 109 hours per month per person), you should really ask yourself whether hourly is for you and your firm. My guess is that the hours are there; capturing them, not so much. A 65 percent utility rate would mean that you are literally giving away 58 hours times your (and/or your team members’) hourly rate per month. I promise that you do not want to multiply that number by 12 to see how much you’re losing in a year. And speaking of capturing them, that is its own administrative headache. Do not fall in love with the amount you earn from hourly billing; ask yourself if it is the right amount overall for the services you’re providing. Utility, not dollars.
Homepage image: ©Lakee MNP/AdobeStock
Sean Low is the go-to business coach for interior designers. His clients have included Nate Berkus, Sawyer Berson, Vicente Wolf, Barry Dixon, Kevin Isbell and McGrath II. Low earned his law degree from the University of Pennsylvania, and as founder-president of The Business of Being Creative, he has long consulted for design businesses. In his Business Advice column for BOH, he answers designers’ most pressing questions. Have a dilemma? Send us an email—and don’t worry, we can keep your details anonymous.