Between meeting with clients and working on projects, most designers find there is little time left in the day to manage day-to-day bookkeeping, let alone think about how to set long-term goals for achieving the best return on investment for the time and money they put into their practice. But as any successful business owner knows, taking your company from survival to thriving hinges on a bit of financial know-how. To help our readers tackle this topic, ASID staff asked finance expert Marc Molinsky, CEO of Designer Advantage, to weigh in with his advice for designers who want to maximize efficiency and profitability for their businesses.
What are the unique challenges that design businesses face when it comes to managing their finances?
The biggest challenges facing interior designers today is finding an efficient and accurate way to manage the bookkeeping and administration of the purchasing process, as well as finding a fee structure that appears reasonable to their clients and while still providing a desirable income from their business operation.
The business of interior design is changing rapidly and interior design clients, particularly on the lower-end side of the design business (projects with budgets that are less than $100,000), are becoming more savvy and empowered to research and purchase products on their own. For this reason, traditional methods for charging fees for design services are becoming problematic, particularly on these smaller budget projects.
With product markups slowly shrinking over time, it is becoming more difficult for designers to make money on the purchasing side of the business. Managing the purchasing is very complex, and paper- and labor- intensive, due to the fact that each purchase order can be comprised of three transactions to the vendor (PO, balance due invoice, shipping invoice) and the client (estimate, balance due invoice, shipping invoice). Each of these six transactions per purchase order must be accounted for properly in an accounting system, filed, and timely and accurately communicated to the client. It is very difficult to find resources within the industry that have the capability to manage the purchase process effectively and at a reasonable cost. That is essentially why I founded DesignerAdvantage Inc. in 2000.
What benefits do designers gain from learning about finance for their businesses? What possible pitfalls can they avoid by getting educated on this topic?
What I have learned over the past 14 years of studying and managing the finances of hundreds of interior design firms throughout the country is that despite the many changes that are occurring within the design industry, the process and cost of managing a design firm is not changing much.
Therefore, this means that in order for a firm to maintain a healthy net income, it cannot afford to have any deterioration in the profit margins they achieve on their projects (despite their clients being tougher on them about fee structures). Our statistics have consistently shown over the past 14 years that interior designers must yield an average gross margin between 35 to 40 percent to achieve an income that is reasonable for an established interior designer’s professional expertise and services. Please note that a gross margin percentage is not the same as a “markup” percentage.
What are the top three pieces of advice you would offer design businesses to keep their finances solvent?
My top three rules for keeping a design firm solvent are as follows:
• Maintain project gross margin percentage in the 35 to 40 percent range.
• Do not pay project-related expenses before your client has paid you.
• Collect an up front retainer for “hourly billings” and replenish the retainer before it has been completely depleted.
Any rules of thumb you give your clients?
Nearly all successful design firms generate over 85 percent of their revenue from referrals (including firms that do over $5 million in annual revenue). If you are not getting the majority of your business from referrals then you need to take a very close look at the way you are servicing your clients. You should see your clients as your “sales force” — if they don’t sell for you then you are going to have a very tough time growing your firm.
Marc A. Molinsky is the founder and CEO of DesignerAdvantage Inc., the nation’s leading provider of bookkeeping, project management and business management services exclusively to the interior design trade. Prior to starting DesignerAdvantage in 2000, Marc served as a CPA at Ernst & Young LLP. Marc received his bachelors in accounting from Boston College.