Sometimes, It Pays to Stay Small
I created a webinar sometime back entitled, “Six-Figure Sole Practitioner.” It provides the key elements of generating $100,000 a more or year in income when working alone. (Sole practitioner, or SP means you’re the only one billing time and calling on clients; everyone has part-timer bookkeepers, and possibly CAD experts and so I don’t count them.)
I also do quite a bit of coaching for sole practitioners. Many people would think it’s the larger firms, those with five or more employees, who see the benefit of expert advice, and are willing to pay for it.
But that’s not always the case. I’ve worked with dozens of SPs and they can easily justify my fees based on just modest improvements to their bottom line.
One of those clients is Rebecca. She has a true sole proprietorship and for the past two years, has taken out $176,000 for herself. That’s real money for a fairly simple business, and those two things are perhaps more closely related than you think.
How does she do it? Just as I pointed out in the Six Figure Sole Practitioner Webinar, she understands what the super-fuel of her bottom line is—time billings. And she bills lots of time, albeit at lower hourly rates than you might think. In fact, within the past year, her rate was set at $135/hr., though she recently raised it to $150/hr. I recommended she keep testing those waters up to $200/hr!
While Rebecca professes to understand little about financial statements or profit margins, she intuitively knows that every hour she bills goes 100% to cover overhead, and after that’s done, 100% into her pocket. That’s very different than an employee billing time, where a huge chunk of the available margin goes to the employee’s wages and the various overhead and support services required.
Rebecca works in an affluent community in one of the country’s hottest growth markets; that can’t hurt. But here’s the interesting thing—she sells very little merchandise! In fact, her time billing represents more than half of her firm’s total sales. Can you do that math? Yes, she’s taking out $176,000 for herself on just over $300,000 in gross sales, meaning merchandise sales are less than $150,000. Assuming at least ten projects a year, that’s barely $15,000 in merchandise sales per project, hardly a good dining room table for a lot of my clients!
And here’s where coaching gets challenging. Rebecca has two almost-college-age kids and wants to boost her income to $250,000 a year over the next three years. What would you advise her to do?
What if Your Overhead Is Too Low to Cut?
Her overhead is obviously super low (even though she does rent a small space) so there’s not much low-hanging fruit there. Which leaves only time billings and merchandise to tinker with. The time billing is the easy one—just raising her hourly billing rate could add $30,000 or more to her bottom line with no additional work or complexity.
Her margins on merchandise sales are slim, about 23%, so I’d advise her to increase prices there as well.
And indeed, the real mother lode appears to be to sell more merchandise on every job. She could if she focused her business model that way. But that means more moving parts and that makes me nervous! If you’ve followed my work over the years, you know how obsessed I am with the hidden costs of complexity. (What I call “dark matter.”)
In other words, the moment she spends more time sourcing, tracking orders, receiving, installing…or hiring someone else to do that…the less time she has to develop business and bill full-value time.
So, it is not clear-cut that Rebecca’s earnings would increase if she boosted gross sales to, say, $600,000, solely on merchandise sales. After all, I’ve worked with many coaching clients who have sales of $1 million and above, and yet who are not able to take out of the business as much as Rebecca does. Why not? Most likely, the cost of complexity.
This is explained by something I coined called the “donut hole,” and it demonstrates that there is a “right size” for interior design firms. One of the right sizes is one, in terms of number of employees. Another is four…but two and three full-time employees can be dangerous, and that is why making the leap to hiring people can be so treacherous.
My advice to Rebecca? Stay small! Raise your fees. Increase your merchandise pricing and do not increase the size or complexity of your firm for at least another year. See how close to $250,000 you get, and then we’ll take another look.