5 Numbers Every Interior Designer Needs to Know in 2022

Comparing Your Firm to Your Peers Can Save You Thousands 

Benchmarking is a key to success 

At DesignerAdvantage, we find the most successful interior design firms are the ones who spend time benchmarking their companies alongside their peers in the industry. Whether its size, location, or another sector, integrating benchmarking into your process will give you valuable data that allows you to establish baselines, identify areas of improvement, and become more competitive in your space. 

Benchmarketing helps your firm: 

  1. Get an outsider’s perspective of your success  
  2. Keep an eye on your performance and changes over time  
  3. Identify areas for improvement within your firm 
  4. Set proper goals and expectations moving forward 
  5. Find the gaps in your profitability and optimization 
  6. Standardize your metrics 

 

5 Stats You Need to Know

#1: Gross Revenue Per Employee 

Productivity is key in our industry. We know your designers are hard at work providing value to your customers; but how productive are they really? By knowing your Gross Revenue per Employee numbers, you are finally able to determine whether your employees are bringing in the value you need from them. 

Say you have an incredible team member, who provides quality work, but after running your numbers, you realize they are managing only $100,000 in product in 2021 while the average for your team turns out to be $500,000! If this employee’s salary is around $50,000, your profitability on them is too low, and you’re not actually bringing in revenue from their efforts. 

 

By knowing these numbers, you can finally start digging into the root cause of why this employee is unprofitable for your firm. Now, you can help train them to overcome weaknesses or move your employees around to focus on their strengths. And as you grow or refine your team, you can better understand who may not be bringing value and stop spinning your wheels when it comes to hiring and firing. 

In our decades of experience managing finances for interior design firms, we firmly believe that without knowing your Gross Revenue per Employee, you can never reach your full potential as a company. You can triple your business, but without increasing gross revenue, it will only cause chaos! 

 

#2: Time Billing vs. Flat Fees 

Many firms ask us, should I use time billing or flat fees to invoice my clients for employee hours? We believe there are pros and cons to each, and it’s critical that you understand your own numbers and compare your firm’s numbers to your competitors. 

Time Billing

When it comes to time billing, one of the first tasks is to examine your market. Every area of the country is different, with varying billable rates and expectations. One of the keys to success with time billing is ensuring that your employees each about 80% of hours worked in their invoices. Without billing 80%, you will fall short in your profit margins and find time billing to be expensive and undervalued. 

By comparing your numbers to your peers, you will be able to see what percentage of hours worked vs. hours billed your main competitors averaged, and determine if this is the right path for you. 

Here are 3 things you need to maximize your profit with Time Billing: 

  1. Make sure you’re charging market value for time/billing rate per employee
  2. Make sure your employee is charging as close to 80% of hours work as possible 
  3. Make sure that you’re paying your employees a proper/reasonable salary relative to what the market is. If you’re paying them way over the market in salary that will hurt your profitability. 

 

Flat Fee Billing 

Flat Fee billing can often feel easier than time billing. However, we always caution our clients that with Flat Fee Billing, you must know your numbers (and your peers’ numbers) regarding how much time is actually being billed versus how many hours are going unpaid. For example, with Time Billing, its important to try and bill 80% of hours worked. 

To determine Flat Fee Billing rates, you need divide the flat fee by the number of hours that your whole team is working to see what percentage of your hours are being billed to the client. Generally, Flat Fee Billing results in about 30-40% of your team’s hours being invoiced to your clients. It’s shockingly lower than Time Billing! 

The challenge with Flat Fees arises because it’s nearly impossible for your client to imagine just how many hours will actually go into getting your project completed. We all know how challenging the interior design industry is, and feel the pain of a new client balking at your estimation of time and effort, simply because they could never dream of the number of revisions, changes, management and consultation that is going into their project. 

This is why a peer analysis of your market will do wonders for your decision on Flat Fee versus Time Billing, and will also help you ensure that you are billing enough of your employee hours to make it worth it. We want to make sure that you feel your clients are paying and appreciating the effort you put into their designs. 

 

#3: Cashflow 

We all know that having healthy and positive cash flow is essential to any small business. It’s truly impossible to have a sustainaby profitable business while experiencing cash flow issues, and unfortunately, just because you are “profitable” in your excel sheet, doesn’t mean you have good cash flow. 

Here are a few examples of how a firm could be profitable but still be in cash flow pain: 

  1. You’re not collecting Time Billing or Flat Fee Billing in a timely manner. Sure, you may be quickly sending off invoices, but if your client isn’t paying you in a reasonable amount of time, the pain your books feel can be immense. 
  2. You’re fronting any money to vendors before your clients pay you for those orders. This can cause you a lot of stress and pain and is a fairly common issue. No one wants to lose a client because of delays in orders, so often designers get anxious and want to get the order out the door before the client pays. This is not sustainable!  
  3. The owner is taking money out of the business and reducing profits. If you do not have your owner disbursements balanced with your profits, your business will quickly suffer. It’s critical to compare your owner’s draw to your peers’, and also compare your disbursements to your cash flow to ensure you’re keeping your company afloat. 

Keeping a clear bird’s eye view of your cash flow will help reduce pain, and comparing your numbers to your peers will help you sleep at night, knowing you are keeping a balance in your firm for long-term growth. 

 

#4: Overhead as a Percentage of Revenue  

Overhead is the amount of non-project related expenses. It’s basically the cost of running the business in every way minus the actual design projects. From the cost of managing the back office, to your rent, utilities, insurance, accounting, marketing and lawyer fees, these numbers matter and you want to ensure you stay within your market’s averages. 

Why is this so important to know? Because often, a design firm may appear at first glance to be very profitable. You may be doing great with your Time Billing rates, keeping clients paying quickly, and drawing a nice number as the owner. However, if you run a true peer analysis report, and crunch your own numbers to determine your Overhead as a Percentage of Revenue and find it to be higher than market averages, you will end up wasting most of your profits in ways could have been avoided.  

Interior Designers are working extremely hard as it is, and you can’t afford to spin your wheels on projects only to miss out on the fruits of your labor simply because you’re paying triple the rent that your competitors pay, or you have one too many high-salary employees. 

At DesignerAdvantage, we’ve found this mismatch between overhead and profits to be one of the greatest motivators to get a peer analysis report. It’s nearly impossible to find these averages “in the wild,” and yet its critical to the financial health of your firm.

Also note that comparing your gross margin to your peers can greatly improve the profitability of your firm as well. Healthy firms average a 35-45% gross margin the interior design industry. If your gross profit is under 35%, it means that 1) your markups are too low or 2) you’re not billing enough time, or 3) your billing is too low. 

 

#5: Net Income as a Percentage of Sales 

And most importantly, we can never forget how critical understanding your Net Income as a Percentage of Sales is! This number is basically how many pennies on the dollar are left after you take all your profit from your jobs and your overhead. 

To find this number, you will take the net income, divide it by your sales and determine the ratio. In order to have a healthy firm, you need to stay within a certain range (something you can determine more accurately with a peer analysis). Typically, this ranges in the 15-30% (from low end to high end of healthy). 

Here are some common reasons why it might be less than that, or your net income percentage might be unhealthy: 

  1. Your overhead is too high 
  2. Your job profit is too low 
  3. Your overall sales are too low 

 

We can’t stress this enough: you must compare your net income as a percentage of sales to your peers to see if it's within a reasonable range. If it’s not, you need to compare and contrast to competitors and then fix the issues. 

Healthy net income percentages actually vary a lot based on geography! Certain cities and states in the US where market value is might higher, clients are willing to pay significantly more per hour for your team’s time. For example, in San Francisico, we’ve found customers are willing to pay the highest time billing rate per hour in the country, with a maximum markup of around 30-35%. In Miami, however, with many international clients hiring designers for second homes, the willingness to pay market rates is much lower. This means in order to compete with local peers, your time billing and fees must reflect the customer benchmarks. 

Call to action 

To get your customized 2021 Peer Analysis Report from DesignerAdvantage, contact our team today.