How Interior Designers Can Reverse Engineer Their Financial Goals
If you’re like every other interior design business owner out there, you have likely established an income goal for the year. Maybe it’s BIG. Maybe it’s a stretch. Or maybe it’s safe, achievable, something you know you’ll be able to hit because prior year data indicates you will.
Whatever that number is doesn't really matter. What matters is whether you have the right projects and activities mapped out to achieve those numbers.
If you’re an interior designer trying to break down your financial goals into actionable steps, I’m going to show you how you can reverse engineer those goal numbers to come up with a solid marketing plan for your year.
For this example, I’m going to use a question a designer just asked me:
“If I want to profit $120k this year, how do I back into that and plan my quarters?”
Here’s what I would recommend. PS: This is not legal, financial, or tax advice.
STEP ONE: KNOW YOUR TAX LIABILITY
First, you have to know your tax liability. When you say profit, you’re likely referring to your earnings before taxes. Consider profit and earnings the same thing — your revenue minus your expenses. So $120k profit is what is left after your COGS and your expenses are subtracted from your revenue (and your expenses may include your salary depending on how your business is structured). You still need to pay taxes on that remaining amount.
So I want you to be clear about those tax implications. Small business owners pay a self-employment tax of 15.3% for Social Security and Medicare, which you pay from your profit. Then there is also your personal income tax on money earned. Personal income tax rates range from 10 to 37 percent. Let’s assume you are somewhere in the middle — at around 30%. So all together, that means that if your earnings before taxes is $120,000, you have to pay 45.3% of that amount towards taxes (30 + 15.3). CRYYYYYYY.
Why do I share that? Because, when you carefully consider your tax hit, you may realize you need to bump up your revenue goals so your company can be more profitable after taxes (especially if you aren’t paying yourself!!).
STEP TWO: DETERMINE HOW MUCH YOU NEED PER MONTH
Let’s say we’re good with $120k being our earnings before taxes. Now, we have to see what we’re working with capacity-wise. If you take summers off or close for December since your clients definitely aren’t having work done during the holidays, you need to mark those dates off.
So, let’s say you take four weeks of vacation and the month of December off, that’s two months. Yes, you’ll likely have some sales coming through on “off months”, but let’s just make this easy.
So we have 10 months to work with.
That means if we want to PROFIT 120,000 in 10 months of work, we need to PROFIT $12,000 for each of those months we work.
Woo hoo! We’re getting closer to a plan.
STEP THREE: ADD IN YOUR EXPENSES TO DETERMINE THE REVENUE NEEDED
At $12,000/month of profit, NOW we can start to figure out what we need to have coming in at the TOP (revenue — all the money coming into your business before expenses) to hit those numbers.
This is where your financial data is going to come in handy. You need to understand what your average profit margin is. You can find this by dividing your profit by your revenue. Remember, revenue is all the money coming into your business; Profit (or earnings before taxes) is revenue minus expenses. This simple calculation —profit divided by revenue —provides a key number for financial planning.
So, let’s make this easy and say your profit margin is 50%. Woo hoo! That’s a good number especially if you sell products.
So you know your profits are generally half of what you bring in at the top.
That means, each month, you need to generate $24,000 of revenue.
Then, from that your COGS and expenses will be deducted, leaving you with about $12k/month in profit (aka earnings before taxes).
Now, I know, I know - the design business is not like this. Months ebb and flow. Product sales hit in January and the expense doesn’t come out until March. I know these things, this is why you have to be “loose” with this. But not so loose that your pricing philosophy is to “charge your worth”...I digress.
But in our pretend design studio, where things are easy and clean, we’re using these numbers.
STEP FOUR: INCORPORATE YOUR MINIMUMS
THIS IS WHERE YOUR MINIMUMS COME INTO PLAY (something I’m allllllllllways talking about!).
If I stood on a stage and said one thing, it would be,
“SET 👏 MINIMUMS 👏 FOR 👏YOUR 👏BUSINESS👏.”
To be honest, you likely already have them in place (even if you don’t think you do). Whether it’s because you know you won’t take a project for under $50,000, or a typical project typically comes in at $40,000…you should have an idea of what a typical project size is for your company.
But, let’s say you have established minimums. This is where it gets easy-ish.
So maybe your design fee minimum is $10,000. And your product sales minimum is $110,000.
You know that a single project that meets your minimums will bring in this much in revenue for your firm:
Design Fee Revenue $10,000
Product Sales Revenue $110,000
Total: $120,000
So, if we know we need to bring in $24k/month of revenue, this single project would cover us for 5 months. 120k divided by 24k = 5.
Which means you would need to do two projects/year to meet your numbers. Remember, we determined that you work 10 months out of the year.
Let’s break it down.
Project One:
Design Fee Revenue$10,000
Product Sales Revenue $110,000
Total: $120,000
Project Two:
Design Fee Revenue $10,000
Product Sales Revenue $110,000
Total: $120,000
Totals:
Design Fee Revenue $20,000
Product Sales Revenue $220,000
Gross Revenue $240,00
- COGS
- Expenses
Profit/Earnings Before Taxes $120,000
STEP FIVE: FACTOR IN YOUR CLOSE RATE/CONVERSION RATE
Now you know what you need to book and how that will impact your marketing. Based on these minimums, you need to get two projects in your pipeline for the year.
So, based on two projects for the year and assuming a 50% close rate on sales calls (if you’re higher, your prices should probably go up), you’ll need to do 4 discovery calls to see 2 of the projects close. This means you’ll probably need to get 8-10 leads/inquiries to convert 50% of those to calls to then convert 50% of those to paid clients.
STEP SIX: MAP OUT THE MARKETING ACTIVITIES NEEDED TO GET YOUR GOAL NUMBER OF LEADS
Then, it’s a matter of your marketing efforts required to GET those leads. How can you get ten people to inquire about your services over a ten-month period?
Do you see how when it’s broken out like this, it doesn’t seem so hard?
Do you send out a monthly email where you ask people to inquire? Do each of your marketing posts on social platforms include a call to action? Do you reach out to past clients and potential referral sources and ask for leads? Do you network and do coffee chats with builders, realtors, and architects?
Map out the activities or actions you will need to take each month to get those inquiries.
And if you track your referral sources (you must!!), you’ll likely have a clear place to start focusing your marketing efforts.
For example, most designers get a majority of their customers from client and network referrals.
So, if I were you and I needed to get 10 inquiries per year, I would set a number of meetings/outreach/phone calls/emails that I would do each week to ensure I achieve those goals.
Now obviously, there is greater complexity to the flow of money through your business — such as the timing for payment of fees, the length of time for project completion, how long it takes you to prepare a fee proposal and scope and get it signed, how you bill your install and styling, other revenue streams you may have, etc. But this example illustrates — at a cursory level — how you can back into your projections and goals for the year. You can then refine your numbers and plug in your actuals based on your company and your billing processes.
And there you have it—a step-by-step example of how to reverse engineer earning goals for interior designers. It's all in the details, breaking down those big numbers into achievable steps.
If REVENUE and COGS and EXPENSES and PROFIT are words that make your head spin or you avoid your numbers because they terrify you, be sure to join us in The Studio where we provide foundational trainings to help you understand your numbers and feel confident in your prices.
PS: If you’re a designer in The Studio, you’ve already received access to this training as part of your membership!
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