How to Set Up a Financially Healthy & Profitable Interior Design Business

Running a successful interiors business doesn’t just require design savvy. Launching and sustaining a profitable design firm requires a lot of financial know-how too. So Zena talked to Michele Williams of Scarlet Thread Consulting — whose firm offers business and financial coaching specifically tailored to the needs of interior designers — to get her tips for running a design business that will be highly profitable this year, the next, and for years to come.

After a career in financial software development, Williams left a six-figure salary in the corporate world to start her own custom window treatment and lighting design business. Although she worked tirelessly…she wasn’t making much money to show for it in her first few years on her own.

She tried talking to colleagues in the design community to get some answers about gross profit margins and goals…but no one seemed to have them. At first, she thought they were gatekeeping the information. “What I later came to find out is they didn't know! They didn't have a clue what they should be doing, or how their numbers should look.” 

So Williams taught herself how to build a financially sound and profitable small business the hard way. Then, she began helping others do the same through her coaching practice for interior designers, online courses, and Profit is a Choice podcast. “If there's a way that I can save you from that pain and torture so that you learn it more quickly and easily, I'm more than happy to help,” she says.

Why Keeping Up With Financials is Important

Williams frequently hears her interior designer clients say that they know that they’re supposed to care about their numbers…but don’t really understand why. She urges them that financials are the backbone of their businesses, and understanding how their choices impact their bottom line is vital: “Every choice in your business is leading you towards or away from profitability…every single one.” Hiring, firing, sales efforts, your workspace, technology: those decisions not only have time and energy implications, but are also attached to concrete dollar amounts.

Not only do designers need to know what money is coming in and out, but Williams urges them to monitor their cash flow too. “One of the main reasons that small companies fail within the first 3 to 5 years is not understanding their cash flow.” Understanding when money comes in and out, what it gets used for, when profit should be recognized, and how profits are allocated can help you avoid an unhealthy “robbing Peter to pay Paul” cycle where you’re using the profits from one project to cover the expenses of another.

Williams also advises clients to understand and regularly analyze five main major anchors of their financials:

• Income (your total revenue)
• Costs of goods sold (everything you pay out for products and services, from rugs and sofas, to fees for wallpaper hangers and upholsterers)
• Gross profit (income minus cost of goods)
• Operating expenses (everything from your office space and expenditures to payroll, advertising, accounting and bookkeeping services, etc.)
• Net profit (gross profit minus operating expenses)

As a coach, Williams is commonly asked what a designer’s gross profit should be. Generally speaking, she recommends between 40 and 60 percent. “If your cost of goods reaches 70 percent, that means your resulting gross profit is 30. You're going to be struggling to make enough money to cover the amount of work that you're doing, and to make sure that you can pay everybody. You're probably not going to be able to hire the way you need to hire, or you're not going to be paid the way you need to be paid.”

Building Profit Into Your Business at the Start

Whether you’re a longtime owner of your own interior design firm, or are going off on your own for the first time, Williams advises her clients practice these habits to maximize their profit potential:

• Understand your pricing strategy and tactics
• Buy from trade sources
• Budget as a company and per job
• Track job costs
• Identify a process that delivers, and is repeatable
• Work with ideal clients
• Communicate well
• When hiring, define the job well before choosing a candidate to make sure the role is a fit for both parties
• For employee longevity, onboard team members fully and provide ongoing education and opportunities 
• Invest in marketing and metrics
• Create and execute strategy with clear intention

Williams also urges clients not to think of profit as what’s leftover after all the expenses are paid. Instead: “Profit is a mindset that shows up in your decision making.”

While the popular principles of GAAP (Generally Accepted Accounting Principles) teach that “sales - expenses = profit,” Williams is a proponent of the Profit-First Method, which flips the equation, teaching that “sales - profit = expenses.” 

“The difference in the profit-first method is, we're going to pull out some profit to keep the business sustainable, so that it'll be here tomorrow when you come back. We're not talking about draining off profits. What we're talking about is: what money do we need to hold in reserves so that we can serve our clients well, pay our bills on time, replenish inventory, and save for a rainy day or pandemic? What do we need to have in our coffers so that this business can hold on and weather a little bit of a storm? 

Setting Your Strategy

“Anything that's going to make you more profitable is going to be started with a strategy,” Williams advises. 

A strategic plan doesn’t need to be super complicated or elaborate…but you do need one in order to execute a clear, well-defined vision. Williams likes to think of it as the top-level “marching orders” for your company. A strategic plan is simply a tool used to define where your company wants to go…and how you’ll get there. It’s not about one goal, but a set of objectives for the company. It is a usable, living document that should be updated regularly.

• Mission statement
• Vision statement
• SWOT analysis (strengths, weaknesses, opportunities, and threats)
• Goals and objectives
• Marketing plan
• Financial plan
• Operations plan

Once you have a clear strategy in place, it will be easier to plan and execute the next steps of your business, which Williams defines as setting SMART goals, creating KPIs (key performance indicators), understanding financial impact, creating a budget, and monitoring. 

Creating Metrics Based on Your Strategic Plan

There are a lot of ways you can measure the health and success of your business. Annual budget, job budget, gross profit percentage, and profit-first allocations are all common examples of big-picture KPIs. You may also want to set benchmarks like total sales, gross profit margin, number of clients, and client satisfaction.

Having the right tools to measure those KPIs and benchmarks is key. And while simple, old-school spreadsheets might still work for some, you’ll likely want more sophisticated software like QuickBooks, or Williams’ own Metrique Solutions for money management, and ClickUp, Asana, Monday, or Basecamp for project and customer relationship management. 

Williams also urges design pros to seek out the software that was created specifically for interior designers, like Houzz, Mydoma, DesignerLogic, Studio Designer, DesignFiles, and Zena. 

Not only can these business tools help you track your budgets and profit margins, but they can offer insights into your business that might be hard to spot otherwise. Williams gave Zena’s project “pulse checks” as an example. Not only do these simple graphs give project budget stats at a glance, but they also show the true project cash flow. By comparing the payments you’ve received for a project vs. how much your business has spent by date, you can see when and where you were shelling out money before you were paid…effectively serving as an interest-free bank for that client. Arming yourself with these types of insights makes it easier to recognize aspects of your business that can be streamlined and refined, which in turn will better your bottom line.

What to Expect From Your Bookkeeper/Accountant

Both bookkeepers and accountants play key roles in most interior design businesses. A bookkeeper is responsible for recording, categorizing, and reconciling income and expenses. An accountant, on the other hand, reviews and analyzes financials and prepares taxes.

In addition to simply being good at their jobs, Williams says that you should expect both types of financial advisors to be willing to understand your business and your goals, and able to meet with you on a regular basis (whatever frequency best meets your needs). They should also feel like a supportive, helpful, and non-judgemental part of your team. “If they make you feel shame, or inadequate in regards to understanding your numbers — that should raise a flag for you,” says Williams. “You may need to find a better partner to help you understand your numbers. And they're out there, I promise you!”

If you’re not happy with your current team, however, be aware that you don’t want to try and start a new relationship in the first four months of the calendar year, when bookkeepers and accountants are at their busiest. The best time to find and onboard a new bookkeeper or accountant is May through the end of the summer. (When shopping around for a new bookkeeper, you’ll also want to make sure they’re willing to use whatever project management and financial software you prefer.)

Whether you’ve got a tried-and-true financial team or you’re shopping around for someone new, Williams shares a few key ways to stay on top of your numbers. First, Williams suggests using an automated system: “That’s the beauty of Zena, right? It automatically organizes transactions by project.”

Also, remember that your business’ finances are an ongoing aspect of your business…and that communication with your financial team is a two-way street. Williams says the biggest piece of feedback she receives from financial pros working with interior designers is that they get too busy to answer their follow-up questions. 

So don’t expect to dump the proverbial shoe box of receipts on your accountant or a bookkeeper and be done with finances for months. Instead, be sure to allocate regular time for keeping your numbers up-to-date. Williams advises that clients schedule “Financial Fridays” to complete tasks like answering bookkeeper questions so they don’t create a cascade effect of small tasks that build up and halt progress.

And don’t think that just because the time you spend keeping your numbers up-to-date aren’t billable hours means they don’t equate to profit. “I would suggest that that time actually is an income generator,” says Williams. “The more that we have those figures in the right places, the more we feel confident in our billing…and the more we can go out and get that money.”