The Three Most Important Things in Interior Design

Margins, Margins, and Margins!

We all know that there are only three important things when it comes to real estate investments—location, location, and location.

And when it comes to the sustainable profitability of your interior design firm, there are also only three important things—margins, margins, and margins!

The problem is that you may not be receiving reports with the data you really need to see. Most interior designers are ill-served by their accounting systems (and accountants?) in this area. To most, “margin” means “gross profit margin,” and they calculate that number from information on their P&L statement, which means they are studying the past, not projecting the future. (And actually, our national surveys show that most designers don’t see this number at all!)

But a trend in margins (growing or shrinking) can be a critical leading indicator that reflects on:

  • Pricing strategy
  • The caliber of clients
  • Budgeting of labor
  • Vendor sources
  • And more…
So, let’s begin with what gross profit is—it’s the difference between price and cost…sort of. Does that help? Of course not, so let’s look at the Sales and Cost of Goods Sold (COGS) portion of a typical P&L statement that I routinely see. This one taken directly from one of my coaching clients:
Merchandise Sales                          $728,548
Income—Time Billings                       125,620
Total Income                                    $854,168
Cost of Goods Sold                         $589,521
Gross Profit                                      $264,647
At this point, the P&L statement would begin to subtract line item expenses (aka, “overhead“) until we arrived at a pre-tax net profit. But for now, I want to get back to the three most important things to any interior designer—margins, margins, and margins!
And I’ll begin by asking, “What is the profit margin for this firm?” If you asked just about any business advisor or accountant you know, they would say, “Well, it’s your gross profit divided by total sales, or $264,647 / $854,168, or about 31%.” Whether that’s “good” or “bad,” would be the subject of some very interesting conversations.
But does this firm really have a 31% gross profit margin?

Not for my money, because I’m more interested in something called your “contribution margin.Contribution margin forces us to separate the time billing and product aspects of your business since they have very different contributions. If your accountant is blending the two together in one lump some revenue bundle, and then subtracting the cost of goods sold (related only to the merchandise) from that bundle, then you are left with a meaningless number.

That approach (by far the most common) is like putting mixed fruit into a sack and then asking, “How much do the apples weigh?” There’s simply no way to tell. So if you are seeing all revenue lumped together, you cannot answer questions such as:

  • How much did time billings contribute to covering our overhead?
  • How much did the margin dollars on merchandise contribute to covering our overhead?
  • Are your margins on product sales trending up or down?
  • What percent of your total overhead costs, or payroll, is related to time billings?
  • And on and on and on…

For more detail on contribution margin (and how to calculate) I refer you to a Special Report in the Archives section for members of The Edge. And in a spoiler alert, a good benchmark would be 39%, not the 31% shown above.

In summary, your margins are everything with regard to profitability. Treat them that way, work for them, and never give them away without first fighting for them.

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