120: How to Determine Which Project to Take for Your Design Firm
Michele 00:00
Hello, my name is Michele, and you're listening to Profit is A Choice. Joining me on the podcast today is Krissy Peterson of K. Peterson Design. Located in Seattle, Washington. Krissy offers full-service design to her clients, and today we're going to tackle a business challenge that she is having. My guess is that each of us has had a similar question at some point, or we certainly will, and this one has a very detailed answer. Take notes because there's a lot to untangle.
Michele 00:36
Every day, empowered entrepreneurs are taking ownership of their company financial health, and enjoying the rewards of reduced stress and more creativity. With my background as a financial software developer, owner of multiple businesses in the interior design industry, educator, and speaker, I coach women in the interior design industry to increase their profits, regain ownership of their bottom line and to have fun again in their business. Welcome to Profit is a Choice.
Michele 01:05
Hey, Krissy, welcome to the podcast.
Krissy 01:07
Thank you for having me.
Michele 01:09
Oh, it's my pleasure. I love these particular podcasts that we're doing called business challenges where we're really talking and digging into what's behind a growth, a scaling challenge. What does that look like? What are some ways that we can approach it? Thank you for submitting one for us to dig into today. So what I would love to do is have you start by sharing with all of us, what is the challenge that you're facing right now.
Krissy 01:38
The biggest challenge I'm facing currently is as I'm getting busier and growing too, is hiring an assistant and taking on bigger expenses than I had previously, where I was solo and working from home. I'm taking all the steps that I want to take in order to grow, which is my ultimate goal, but I'm still filtering through a lot of these smaller projects that were easier for me to take on when my expenses were lower, and I could more reasonably take on whatever project came along. Now I feel the need to have a different lens, so to speak, on which projects I actually take on, to make sure that they actually support the expenses and the growth that I want to make as a company. So having a better understanding of what those numbers might look like, which makes it easier for me to say yes or no to something. I of course, want to help everybody, but I can't because it's very clear cut, because it doesn't fit in line with the profitability I need for my company to grow.
Michele 02:56
So before we jump into even more details about that, I definitely understand what you're asking. Tell us a little bit about your company. So as full-service interior design, what types of projects do you hope to do? What is it that your company currently does?
Krissy 03:14
Currently, I do a full-service interior design for both remodels and full service renovate renovation, and furniture and decor. I like to take the projects from beginning to end, and they're all residential. In the past, it's been maybe one room, 2-3 rooms, and I've had a couple of opportunities to do more bigger projects where it's a whole main floor or a whole home, and I loved that. So being able to take the house from beginning to end, whether it is a new or a full home remodel, was really exciting. That is my ultimate goal, which I think most designers would probably love but to really hone in on those bigger renovations where you're doing multiple rooms or an entire home and then also having all new furniture and decor along with that.
Michele 04:13
Okay, so having not only the remodel design budget, but having the budget for product to go in.
Krissy 04:22
Correct.
Michele 04:22
Okay. How long have you been in business, Krissy?
Krissy 04:26
I've got my business license in 2007, no 2013, and I've sort of had one foot in one foot out for about three or four years. The last two years, because I was having kids, I've been going full force full time almost at it again, and really focusing my attention on it.
Michele 04:54
Okay, and you serve clients in Washington State?
Krissy 04:59
Yes. Seattle and suburbs.
Michele 05:01
Okay. Well, the good thing is there are people out there who can totally afford what you do, which is great. Because sometimes, it's true that we have designers all across the country, and some are in areas where it's a lot more difficult to reach their ideal client. So what you just described to me, if I were to repeat it back to you, was an ideal project over the last few years, started off with perhaps a room renovation and furnishings, and it has now morphed into a whole level of a home or the entire home, so much bigger projects and scope and in a budget. So has your ideal client change? Certainly, we know is the ideal client that once the big project versus the small, but has characteristics of the client changed?
Krissy 05:53
Yeah, I think so. The clients in the beginning and I still do relate to this client, but I relate active families with kids with one person, who is a full-time worker out of the house, and then the other is the person that I would sort of deal with. That was the ideal situation for that type of clients because we can meet during the day. I have kids too, so it was relatable and easy. Now that's shifted a little bit, of course, I still love to work with families, but in terms of their income status, it is a full-time worker's home, with family. The families that I have worked for in the past have more practical budgets. Now I want to be able to do more in line with somebody who has more extra income. So I've been sort of trying out different marketing techniques to focus in on these different areas and neighborhoods that I know that those people live.
Michele 07:07
So these are the people who have a little bit more cash that they can spend on in fixing up their home. In some areas, that also has to do with age. How old are your kids, whether you're planning on being in the home for a while versus only for a two to three-year stint? There's a lot that kind of plays into that. Would you describe your first few years where you were a little more intentional in the business as being very kind of reactive in the work that came to you? Meaning you kind of said yes to the one room or the one to two rooms because that's what was coming to you?
Krissy 07:48
Yeah. I still sort of have that knee jerk reaction to do that, too. Because anytime I get an inquiry, I'm excited. This is an exciting job, and I'm still fairly new at it. So I'm not super seasoned. It's still exciting for me to have people reach out and want to work with me in any capacity. But yes, the first few years where I was actually really getting business, it wasn't just my mom's mom's friend or whatever. I would definitely describe it as reactionary where, anything that came across, I would say yes to and fit it in.
Michele 08:25
And that's how most of us start. I can remember. I used to call it on a few. You're young, but you maybe know who Sally Field is.
Krissy 08:35
Yes!
Michele 08:35
Well, you know, I don't take anything for granted these days. In one of her, I guess it was Oscars or something. When she won, she got up at the stage, and her comment was, "You like me. You really liked me?" And that's how I remember if I were to describe the feeling of getting the phone call. And I hope you never lose the excitement of somebody calling to say they want to work with your company. Even if not everybody is your client. I hope that you never lose that. I know I've been in business for over 20 years, and I get excited at every discovery call that comes across my desk. I also know that I'm not going to be an exact fit for everyone nor them for me, but excited for the fact that they were willing to reach out and put their questions down on paper or their needs down in a form. I think it speaks very highly of you and of your business as it does of mine as well. I'm still excited to talk to them. So let's hope that whatever we choose to do today, that we don't lose that excitement because that's what keeps it fresh for us, makes us love our job, and want to do it right. When you finally get to the point that you almost get irritated to somebody reaching out, and I've been there, then that tells you that something is misaligned in your business. So when you're getting what you've asked for, and you're finding yourself irritated, frustrated, angry, something's misaligned. Something's off, and that should raise a flag for us.
Krissy 10:12
Yeah, it just sounds like you're not enjoying your job.
Michele 10:14
Right. I'll tell you when I felt that way before when I had too much work. I was taking on what maybe were not the best jobs for me. I didn't know how I could serve the next client. So even though I wanted my ideal client to come, I didn't even know how I was going to have the capacity to serve them. Then you automatically start to feel frustrated when they come in because you don't know that you can say yes, and although I'm not a people pleaser, I do want to please people if that makes sense. I like helping people. I like encouraging people, but I would never turn myself as a people pleaser. It still is something that I have to watch. I mean, we all do. Alright, so you have had a little bit more of a reaction to that ideal client. You have shifted who the ideal client is a little bit. You've kind of narrowed that down, especially as you've moved up into whole household floors, they've got to have a bit more discretionary income than somebody who's maybe doing one room at a time. So we can start to see how that moves with them. You mentioned that you enjoy doing the remodel, the renovation, as well as a from scratch build. That's two sides of the same coin, but certainly a beginning to end project. Okay, so we've got all that figured out. Now, my question to you is this because the goal of what you're really asking, and your challenge today is, if you have defined these things, how do you turn your business from one that is reactive into proactive? We talked about this on a coaching call, I think in the last couple of days, but we talked about reactive is where we're sitting here, taking what comes versus proactive is saying, here's what I need in my business, here's what I need for project, here's what I need. Now, let me go find it. So we want to do a little bit of shift because the power comes from being able to go get what you want, as opposed to sitting and just taking what comes. It comes from so defining the messaging that what comes to you is what you want, but it still requires us to do some of that front work. You mentioned having done some playing around with your marketing. What have you tried?
Krissy 12:47
A couple of things, and they're not fully done yet. They're still in processes, but one of the things that I am trying actually is, me and my marketing manager did this really beautiful, direct mailer card on a really nice paper with beautiful imagery and a good message. There's an area of my city where Bill Gates lives and the Amazon people, so there's like some really affluent areas. We're going to do and try out a couple of direct mailer marketing, marketing campaigns directly into these neighborhoods that I want to work in specifically. So that's one, and it's still in progress we're still making it, so it hasn't mailed out yet. I'm really interested to see how that works because my idea sparked when I read - I forget what an article from what source- but the article title was direct mailing is not dead, especially for specific generation and age groups who are still looking at their mail. So I am going to give it a shot and see how that works. I feel that's one way because there are different ways, but how do you rub shoulders with the people that you actually want to work with? Well, I'm not going to spend $500,000 to join their country club. Benefits are not going right now, auctions, and all those things that we might be able to get into, and preschools are at home. So all of these ways that I would maybe be able to kind of meet, these people are sort of on hold at the moment. I'm trying to turn in a different avenue. Then the other thing, which I have not done very much, is actually reaching out to architects and builders that have a fabulous reputation in our area for doing more high-end homes. I haven't quite figured out exactly how to approach them. I don't know the best way to market myself to them yet, but I feel like if I want to be doing renovations, I need to know the builders who do amazing renovations, and they need to know me too. So that's where I'm starting.
Michele 15:00
That's really good, and I love that they're in the process. No problem with that. I was having a coaching call with someone earlier today, and she was asking me the same kind of thing about how is it now that we can't go see each other in person and everything is the six-foot distance. So even if you were at some high-end boutique while shopping, somebody came up and got too close to you, you get away from them. The techniques that we used eight months a year ago are not necessarily going to work the same way right now. So what I said to her was, "where are they? And how do you get in front of them? And what age group are they?" I do believe that you're not going to put down anybody by their age, but the older you get, the less likely you are to be hanging out on some of the social media channels. A direct mailer is going to be a little more effective coming into your home then those in a lower age range, just because of what they're used to.
Krissy 15:59
Yeah.
Michele 16:00
So I love that idea. I'm always going to encourage you to keep up with the budget that you spent with printing, mailing, the budget that you spent on the time, and paying your marketing person so that we know what that marketing campaign cost you. You can tell who comes in and what amount you might recoup over that amount of time, then we can start looking at the ROI of that particular project. Don't forget what's fresh in your mind when you go ahead. As we start looking at these projects, there is a cost to acquire clients, and we need to keep that at the forefront of what we're doing. Just like when we pay, let's say for a Facebook ad, and you pay per click, or you pay for per click through, and what are they doing? How are they doing it? We still have a cost associated with even buying the list of people, the cost of mailing it, having the card designed, printed, and even the messaging behind it. So let's keep up with that because I know as we continue to go through this, you're in my inner circle, I do want us to keep up and watch the ROI so that you have that next campaign. Then we can take a look at over how many houses, how much time, and we can break it down for ways. The next thing that I would say to you is, and this is important as well when you talked about the messaging on the card, one of the best things that you can do is think about everywhere else that you're messaging. If you are wanting to do whole house, whole floors, we need to let that be the messaging that goes out on your Instagram, on your website, on Facebook, and on social media posts. While you may be calling attention to a little vignette that you did, somewhere, you want to in the copy, make sure you're talking about the whole house design. This one vignette really spoke to me so that they don't then think, "Oh, I can call Krissy, she'll come just do a corner of my family room or something." You want to speak to what it is you want to do. Let's make certain that when we are being proactive, we are messaging as much as we possibly can, full house, whole floor renovation, large scale, like put it out there what you want. Because I'll tell you, if there's something that you don't want to do, something that you don't like to do, that is going to be the one thing that they call you for if you put it out there, it just happened. Every time, it doesn't matter, I remember making a window treatment one time and again, "Oh gosh, I hope I never have to do that again," and I put it out. At that time we have something called picture trail. We didn't even have websites back then. It was like an online portfolio that you could click through. That was the thing that everybody asked me to do, and I said, "Michele, you're such a ding dong. Don't put a picture out there about something that you don't want to do again," or like a model home and everybody wants the model home house. Keep that in mind as you are promoting these things in your flyers and all that. The imagery is great. Let's make sure that it's the imagery that speaks to large scale, whole house, big, is what you do. Just think about those big words.
Michele 19:31
Now from the marketing side, certainly, there's much more to it, but from a broad sweep or broad stroke, we're speaking big, we're talking big. We're putting it out there, so those that are recognizing what their project looks like are going to call you. Now what you also asked is you want to look down and say now, what kind of numbers does that break down to? And what kind of numbers does it break down for you? First of all, we won't be able to dig into all of the details of all the numbers on this call because it is so darn much, but let me give you an idea of where to start with. There's a whole list of things to do, but the first thing I have you do is really think about how much time you have to put into the business and how much money you need to make. That is the lifestyle congruence that we talked about. That is the equivalent of your husband going, "I got to work a $40-hour job, and I'm getting X amount in salary." So we want you to think the same way. Then what we're going to do is, if anybody is listening, what they should do is go listen to the backwards financials. There's a whole podcast called backwards financials with Tracy Taylor, and I'll link that in the show notes. The backwards financials helps you walk through, what I need to bring home, my expenses, gross profit, my margins, and what myself should be. So you and I have built and are continuing to work through your backwards financial plan. Here's the deal, though, when you get to gross profit, that number is the profit from either product sales, or service. So it was either design-time design hours that you get paid for, or the profit from the markup on a cost of good. That is a lever that we get to pull, so we get to say, "I want to be all service-based," or "I want to be all product-based," or "I wouldn't it be some combo of the two." The way that we usually kind of pull that lever has to do with a couple of things. Who are we selling to, and how much can I mark up. There are some designers that I know that mark up 100% or 75% consistently. Then I know some designers that feel like they are struggling to mark up 10 to 15%. And so that's a huge lever. If I have something that's $100 on my base price, and I'm going to mark it up 100% I'm going to charge $200 for it. I just made $100 to sell $100 base item. Now, if I can only mark it up 15%, I'm going to sell that hundred dollar item for $115, I made $15 the difference between the two people standing there, one for $200 and made $100. The other sold it for $115 and made $15. Is one right and one wrong? No, but there's one that's going to be richer than the other.
Michele 22:57
The difference is who they sold it to and how they valued it. How did they build value around that sale, and who did they sell it to. Did the other person that they sold it to think that it was valuable at that price? I'm using an extreme, and it seems extreme, but I see it every single day in the design industry. We just don't think about it, but there is nothing wrong with selling it at a markup if that makes money. Now for those designers that sell it at $100, and then give them 10% off because of some other thing, they're losing money on every sale. If we then look at charging for a time that was spent to do all of these things, we have some designers that are charging, let's say $100 an hour, and some that are $175 or $200 an hour. So you tell me, the person that charged $175, meaning that they actually are worth this. There's a true value, expertise, knowledge, and all of that. Nobody's robbing anybody here, but you can see how those numbers are vastly different. This person made $115 out of one hour to sell that product, and this person made $275 in profit out of that same hour. You see how the two levers weren't back and forth. What you have to do is to find the lever and the ways to pull those that is right for you and for the clients that you're serving. When you said, that you're looking for clients who want the whole house, or the whole floor, and that they have more dispensable disposable cash, they have more money that they can spend to do that. You can have beautiful design at multiple levels. So what we have to do is to marry all of this together and find out who you're serving, what is it that you're doing, how we're going to value it, what does it take you for your process, and how do we make the most money? Everything is going to come back down to money, people, and process, because those are the levers that we pull in a business anyway, back to your question with some hard numbers here. If you were to look at these large projects, we need to go through, and we need to start doing some deep dives into project profitability. What does it look like on your side to have a truly profitable project? When we look at Project profitability, people tend to just look at why I made X amount of dollars, isn't that what it should be, but the truth of the matter is, when we are looking at profitability, we need to look at about five areas. First, we're going to look at how much profit did I make for gross profit? Gross profit is the gross profit amount and the gross profit margin. That is the money that we make in profit, after we remove cost of goods. This is usually before we start and not including all that tiny Job Costing, so we don't really have our employee time built into this. We're just looking at service/design, plus how much we made off the product. The next thing is what was our time profit?
Michele 26:38
If time is a currency, what was my profitability? The way that you do that is you start thinking about how much time did I budget/anticipate for this project? How much time did that take me to get it done for you, and employees, or anybody else that has something to do with the billable aspect of that project, that's when we start looking at billable time. One, we're just looking at high-level profit, gross profit. Now we're going to look at, I said, "this was gonna take me 14 hours, it took me 10. I'm coming out for the better," or "Oh, my gosh, oh, my gosh, I told him it was going to be 14 hours, it's taken me 26. And I'm still not done because they can't make a decision. And now I'm still going. And it was flat rate, and I'm losing money," That's time profit. The next thing we're going to look at is net profit. That's where we're looking at all of it together. How much does it cost to keep the company open per hour? How much does it cost for the hours that were spent on the project? Now, if I took the gross profit of that project, I subtract out the time profit, and I subtract out every other expense to run the company for that time, because every one of these projects, we cannot miss the fact that we're taking them for the running of the company. This company took up X number of hours or days or weeks of my company's time that I need to be able to allocate some amount of my company expenses to that project. Now, what did I really make on that project, then we asked ourselves, what do I keep? What work? Then I'll do it again, what didn't work? Am I going to throw it away or change it, and what did I learn out of all of this? Because that's how we're continuing to get better at what we do. You also want to look at resource and process efficiencies. You're asking yourself things like, did I have the right resource on it? Was this assistant equipped for this? Did he have enough time to do it? What was the issue? What was it that worked really well? Maybe they're so new to CAD, that it took them 14 times to get a drawing done? What if I had outsourced it and somebody could do it in three hours, but it took him four days, you see what I'm saying? Because that cost you every single time. So if we don't do these reviews for our projects, then it is really hard to go back and truthfully answer with analytics and empirical data to answer the question that you're asking, because otherwise, we're always going off a gut feeling. Nine times out of 10, the gut feelings don't show the entire picture. So back to looking at yours, if you were to look at the fact that you say I want to know how much money and we come up with, here's your salary that you want to make. Then here's the amount we got to cover in taxes, here's the profit we want to make in your company, and all of that gets added together with any profit sharing 401k, that becomes your net profit.
Michele 30:10
Then we look at your expenses to get the gross profit. Now what we want to do is start thinking about how much you're actually working a year, less say, on average, I see people able to bill out for billable time, about half of the time that they spend in the company. Now, if you are working a 40 hour week, I can see most people billing somewhere between 15 and 20 hours. I do have some that can bill more than that, of course, we're not talking about an install week. I do see some who are billing more than that. Krissy, but usually they've got an entire staff who's doing all that little work behind them because we know it takes a lot of work.
Krissy 31:00
Yes. Okay.
Michele 31:02
So then we look at it. Do you really want to have yourself plan to build 15 hours a week, 20 hours a week, for every week of the month or for less than that? Do you want to work two full weeks for your billing and two weeks where you're building the business? And we can start to take those hours and how many hours do you really have for billable work? Sometimes, or most of the time you need to spend a whole day a week, the equivalent of six to eight hours a week just on marketing business unless you already have everything in, so what time adds up very quickly. Be very honest with yourself on this, "Is this really how much time I have to put into the business." The year that my business shifted when I started making more than the year before, like really shifting, was the year that I had to teach my son because we found out he was dyslexic. I realized I had less time than I had had before to put into my business. Therefore that time and those hours became so much more valuable than they were before. Because of that, I increased my rates and went after better work, because what if I only had 10 hours a week. For example, I better take the best 10 hours I can take, and that would be the question to you is how much billable time do you really think you have in the company? One way to look at that is to go back and look at your past work. How much did I actually spend each week billable? What is my average for? How I worked? And people weren't really fast, for you to have consistently 15 to 20 hours of billable work every week means you got to have a bunch of projects sitting there waiting. So you need to start looking at on average. What is it that you can build? What is it that your assistant can build. Now that we know how many hours you have, you can multiply that by your hourly rate. You're going to know what your income is. You can divide it out by looking at the types of projects, whole house, or looking at the whole floor renovations. What size projects have you had in the past? Do this deep dive. Did you make enough money, so your gross profit margins are where they needed to be? What if not, what needed to be increased? We needed to have allocated more time for this, we didn't budget enough time if we gave a flat rate, and therefore we lost money, or we made money on the time, but we didn't mark up that the product enough, so we missed that opportunity. You're going to have to start looking at how you want to play between those two to get you what you want. Most of the time, I see people just go; for example, they mark up 35 to 40% of my hourly rate, but it is blank, so they just throw it out there. In a lot of cases, they don't know what those numbers really represent, and they can get paid for that amount. If they're not managing it, it may not actually give them the money they need to make the end of the day. That's why there are so many layers to this. Then I would ask you, not only whole house and renovations Krissy, what do you love to do? Do you love kitchen renovations? Or do you love ripping it down to studs and building it back up? What pieces and parts or even down in the project do you love? If I were to ask you that, what would you say just off the top of your head? Here's what I love most...
Krissy 34:54
I love taking a home, an actual existing home, and the footprint, then taking it down to the studs and completely reimagining it. I had a project that was pre-COVID. It was happening in the work that was going on, and it was the funnest project because it was this older, 1980s home. We got to completely reimage everything in it, taking it down in the sense that it was coming from this sort of Northwest Craftsman to a totally modern, beautiful house. We were expanding it, there was an addition and things like that. Then, of course, thinking through all the finishes and how all the finishes work with the furniture plan. So being able to select those kind of big finished pieces and also work with the furniture was like the best ever.
Michele 35:55
Right? That's awesome. Now let me ask you this, the subdivisions that you're reaching into and those affluent areas, do they give you the chance to do that.
Krissy 36:06
It has potential, and the reason is because those neighborhoods are older. Okay, so a lot of the houses are sometimes from the 60s 70s were either most of the time and up for a majority of them, they've been bulldozed and made, you know, big, beautiful homes out of them. Some of them are these big palatial homes that were built in the 80s and 90s, that probably need a refresh. There are some new builds, but there's not that many, because it's an it's just a more established older neighborhood. So, but they all of the homes are, what I love about them, too, is that they're all different. It's not like sort of a lot of in my area, we have a lot of very similar homes in the sort of mid-level range where it was a builder that kind of just did an end neighborhood with three different styles. It lacks a lot of character, and when you get into these other neighborhoods, they're all mostly Custom Homes, whether or not they're new or old, but they have so much more character and have the ability to be so much more creative.
Michele 37:23
I hope you see how your face lights up. Like we can see each other through zoom. I want you to go into those neighborhoods, like if you were going into a neighborhood that didn't give you that thrill. That's a flag. When you price your work, we're pricing for a couple of things for pricing for what we know, or knowledge, for expertise, the ability to do it. We're pricing for the time that it takes you. We're pricing for the stress that you take on, so they don't have to, and we're pricing for the value that you bring, which is a combo of all of that. So then what I would ask you is and you don't have to we're not you don't give out your numbers, but your hourly rate, does it reflect all of that? For the projects that you're looking to do, if you were to do the post mortem on say, I spent X amount of hours, chances are we don't always charge every hour that we spend. So I charge the equivalent of this many hours. This was their product budget, this was how much I made in profit, this was my markup, this was my margin, then I would ask yourself, is that a job that for the same amount of money, say for the same people in the same way, you would do it again? If it's not, then that tells you something needs to shift; either your hourly rate shifts, the amount of flat fee or design fees has to shift because you underestimated it, or the market has to shift because you realize how much more it's taking you to get it done and maybe that gross profit margin was too low, I would also encourage you to look at gross profit margin for the overall project. But to also look at it just with regard to product sales are two different numbers. If we're looking at a gross profit margin of 40%, and it includes service income and product income, that means that you probably charged a lot less for the product than what you think you did. So when you look at any of these projects that you've done that you love, ask yourself did I feel like my company and I were fairly compensated for all that work? Or do I feel like I did all of that work, and I loved it, and I enjoyed it, but I just don't feel like I made what I should make.
Krissy 40:03
Mm hmm.
Michele 40:03
You'll have some type of a response to that. That gives you an idea of where to start looking for which lever. Do you need to start pulling in, maybe you have to pull both, an hourly rate needs to creep up, maybe the amount of markup needs to go up. Then we have to, manage the heck out of it and the company, but that is going to help you start to figure out what size budgets you need. So that you can go back, the majority of these projects all take me 80 hours, and I'm at $200 an hour. You can easily do that math at times $200 and tell them what the design fees. In general, the design fees are around..." and you can give them a number. If you know that in general, the product budgets need to be XYZ for let's say $250,000 for you to even get in, because you know what your percentages are that you need to be able to say that, but you're not going to know it until you come at this for more than one direction. That's really why this is more of a complex issue than I think a lot of business owners give it credit for, it's about looking at it. From a project standpoint, or product standpoint, a service standpoint, the entire company, how much you want to put into it, what do you want to do? And is it even realistic? I have people that call me sometimes and tell me they want, to make hundreds of thousands of dollars in net profit, but they really only want to work about five hours a week. Well that sounds nice. I think I would sign up for that as well. Okay. But I'm just saying it's not usually very realistic. We have to check out what's realistic in your area, but also what feels good to you, because you can sell what you believe in. Remember the person that's that's marking up the hundred dollar item to $115 and the person that's marking up the same item $200. But if I told that person that marked it up $115 that they could mark it up 200 and they didn't believe me, they could never sell it. But if they believed me, they had the right client, and they could position the value of it, then they could do it. So a lot of this comes down to modeling. Do you do a lot of modeling with your financials like this and going into Excel?
Krissy 42:43
I'm getting better at it. It was my goal this last year to figure out all my financials, which is why I signed up for your program. Went through all your videos and did the whole thing. It's all still very new to work through all of the modeling. It still takes me, forever to figure it all out, but what I have started doing, which has been really helpful, and I sort of took all of my project management stuff offline, because I found that none of the project management tools could actually tell me all of these little finite numbers and answers. I made my own in Excel, and I have a profitability page on each of my clients like FF and E spreadsheets, that tells me a lot of these things. There's a couple that I don't have yet that I will definitely be looking at adding, but at the end of the day, I know what my hourly rate was even just based on the time I spent and the fee I charge. I know what my margin on my product was separate from that, then what the total is, what I paid for shipping, what I marked up on shipping, and all the little numbers to say was this a profitable project? It's been really helpful and valuable to kind of break down all of those things to be able to actually see what those numbers are? And, which is why it's starting to bring up all of these questions. So how do I make sure that in the beginning, because when you when you meet with clients, you don't really know. They say, "well, I want to do my living room, I don't really know what my budget is, I want to do this, and I think we have $100,000 budget for the kitchen, but I don't know." It's just sort of these those sort of wishy washy things, and I'm trying to figure out. Now that I'm a better able to track it on my end, to figure out profitability, even before I get in the door.
Michele 44:49
Yeah. Here's one of the things I'll tell you, a lot of times your clients are not going to know their budget, and that's where they're coming up, I help them create a budget. So a couple things you need to do is number one, you create budgets. You can do that, even without a client. Create the budget for what you want to sell. I know that to go in to do a kitchen is going to take this number of hours, if I really want to do it. It's going to take me on average, this number of hours. I also know this is the lowest end product, for example, that I want to sell in that kitchen or appliances or whatever. This is what it looks like, you now have just created a beginning budget. So when you go in and talk to them, and they say, "I think I have $100,000," you can say, "okay, so here's what we could get for $100,000." You can start to share that with them you can work through I mean, they're all kind of, we could have probably 15 calls on just budget nuances and how to get through that there's lots of information out there, but you get to be the one to start creating that budget for them. They're not going to know. That budget is also created based on the way you mark up and your hourly rate. That's why they are not going to know what they can get or can't get. That's why they can also spend X amount with you and X amount with a different designer and get two different outcomes. You have to know that another big pieces do you take? This was one of the things we talked about? Do you allocate? I did a podcast that's going to be coming out before this one. So I will link it as well in the show notes on Job Costing? Do you have an idea of the hourly rate just to keep your business open and have it attached to the hours that are spent on each project? So that then you can look at the net of everything per project?
Krissy 46:46
So the hourly rate of like what might for open number and the hourly rate? I don't have that.
Michele 46:56
That the next thing you're going to need? Okay, so just a very high level. You take your expenses, divided down by the number of hours that are open. That's an overall kind of company rate. Now we can again go into more detailed all over the place and do it by client or by employee and really get granular with it, but I would start with the example that I worked with you on the other day, when we were talking about it in the coaching call, we had expenses of $100,000 for the year. If I divide that by let's say that the company is open 50 weeks a year, and let's say it shuts down for two weeks, so it's just open for 55 divided by 50, and then divide it by 40. That tells me that the company rate is $50 an hour. It cost you $50 an hour to have that company operate. You can look at it with your pay without your pay based on how you're doing it. When we're really looking at a project, and we're asking ourselves, "how much money did I make?" at the end of the day, we need to also be looking at what the cost was to run the company. The other thing that I would say, Krissy is to ask yourself, mentally, how many projects you can take because you're a mom with young kids? How many projects do I have space for in my brain at any given time? Yeah, some people say, Oh, my gosh, I love having 5000 projects going. Others will say, three really big projects at a time. So then you can take that amount, and if you know that your projects last, let's say 12 weeks, and you only want to do three, then that's three quarter, then that would be a total of 12 a year. You can take then your financials divided by 12. It's going to give you the average for each job. That's a super high-level way to do it.
Krissy 49:00
Yeah. Okay. Interesting.
Michele 49:02
So I guess all this is to say, you can actually find the information out about 50 different ways. Again, I didn't mean to overwhelm you and the listeners as well, there are lots of ways to look at your numbers and to think through it and to really make sure that you're doing either going super high level. I want to make X amount of money. I only want to work on three projects at a time. My Projects last 12 weeks. Therefore, I can do three a quarter, three times four is 12. I can do 12 projects a year. I've got some clients that only do like four projects a year, their optics are huge. They last a year. They are long term avidly. Some of them are two and three year projects but they are huge. They're making millions but they only work on for the entire year. So a lot of that comes down to what is it that you love to do and how long does it take? How much does it take you and how much money does it need to make for you to have a lifestyle and to pay for the people on the team? That's why it's not just a cut and dry answer. There's a lot of decision making that goes on. What I know you've already got your people for that. That's why I love doing it in Excel or something like that because you can run models. Well, what if I do this? What if I do that? What if I sold this? What if I sold that and is talking to another client this morning is the equivalent of I can have nine clients that each pay me $100,000. Or I can have three clients that pay me $300,000.
Krissy 50:37
I want less, but bigger projects. So less clients, for sure.
Michele 50:42
Somebody else may say you know what, I get so bored with people that like the shorter project, I'd rather have $900 totally fine, but that just means their model is different than your model.You've got to make some of those foundational decisions, then we go market to get $300,000 project, because that's a different conversation than going after a $100,000 project.
Krissy 51:03
Okay, great.
Michele 51:05
I probably just threw all the balls up in the air and really made you go "Oh, my gosh."
Krissy 51:09
No, but it is helpful to think through some of these other things, be able to go back now, and look at some of these other projects. I think you're right, just start running models and making some more concrete notes in an Excel or something to come to some numbers and I can go back to with each new inquiry.
Michele 51:36
Yes, and as you can see, this is where your process comes into play. The more you have, the Krissy Peterson process that you follow, and your team follows, the more you can kind of anticipate, see what's going to happen, and not be working like this where every client comes at you differently. You can see how that plays into profitability as well. The good thing is we're going to be continuing to work through this and the designers inner circle so you're going to get full support there and we also will be working through it at the big designers inner circle workshop. You're gonna have plenty of opportunity to get support around it as you move forward into ask questions and so that that's been helpful for you. Fully declare the mud up a little bit as you continue to get through this, but this a question that I think a lot of us asked. How can I work less but make more. I don't mean that we're not working, but just that we don't feel like we're working hundred hours, running around like a chicken with their head cut off, and feeling like what we bring home to the end of the day is not equivalent to all of that work. We want to feel appreciated and take the best jobs for us. This is a very personal thing. It really is. Well, I appreciate you opening up this large can of worms to talk about.
Krissy 53:04
Hopefully, it was helpful for some other people as well to kind of think through some of these metrics.
Michele 53:10
I know and I'm sure there are going to be plenty of listeners who'd like to run away screaming, and they probably already got this point. That's okay. Hang in there. Again, you're not going to get all this the first time through. Nobody gets everything the first time, including myself. Let me wrap up with this. Sometimes when I go in to look at projects, look at offers, and to look at these things I put on, you mentioned at the beginning one set of glasses or one lens, I'm going to look at it from this vantage point, then I might give myself a little bit of time. Then turn around and go look at it from another vantage point. Just like if you were to see something happening, look at it one way then you move to the left and to the right. So just know that you may need to come from more than one angle to really narrow down to get the answer that you want.
Krissy 54:03
Yeah. Okay, got that.
Michele 54:05
Krissy, thank you so much. I appreciate your time.
Krissy 54:07
Thanks Michele, appreciate it.
Michele 54:09
All right, talk soon.
Krissy 54:11
Okay.
Michele 54:12
Thank you, Krissy for coming on the podcast, sharing your question, and then allowing us to dig in a little. I know that we covered a lot of details and that this was really a lot to take in. Please know business changes and analysis can sometimes be simple and easy and quick, and other times it can be much more nuanced and time consuming. If you need assistance to do this level of analysis and detail investigation in your own business, please let me assist you. You can go to ScarletThreadConsulting.com and sign up for a discovery call. We'll talk about what you need and how I can help you choose to be profitable, but this profit doesn't happen by accident.