Don’t let the word “budget” scare you — let it inspire you! Even if you’re happy to hire out all financial aspects of the business, crafting a budget that sets meaningful goals for your business in the coming year can be a powerful motivator as well as an important bellwether of all things growth (or stagnation) in your interior design business. Just ask Ruth Ann Janson, President of The Dove Agency, which provides financial, operations and marketing services to interior design firms, artists and design showrooms. In a recent webinar with Studio Designer’s The Work of Design LIVE!, Janson delved into the importance of budgeting, the nuances of an effective budget, and, perhaps most importantly for the time-strapped among us, two simple ways of creating a budget.
What’s the point of having a budget?
As Janson shared during her presentation, which you are invited to view in its entirety [here], the goal of a 2024 budget is truly a practical one: “What do you do with it? How are you going to use that to monitor your business, make better business decisions, and… propel your business forward in 2024?” Drawing on reports generated in Studio Designer (“The nice thing about Studio is that, with the touch of a few buttons, you have the historical data that you need to get started with your budget,” she reflects), Janson illustrated how to use financial data to illuminate a clear picture of your firm’s financial future.
The point, she says, is “taking a look at where you’ve been to think about where you’re going to be going. Financials, whether you’re looking at them monthly, quarterly, or annually, they really tell a story about your business. Where have we gone, to see where we are going in the future.”
How do I create a budget?
Set aside the right amount of time. If you’re a single proprietor or a smaller firm, it might involve a two to three hour process. If you’re running a bigger firm, it may take a full day or more. Sitting down with the income reports generated by Studio Designer, work with your firm’s trusted advisors — whether it’s your business coach and CPA, or your spouse — to analyze the prior year, or the set financial period in question. “It’s really important you’re not doing it in a vacuum,” says Janson. Seek out “feedback from other individuals who are associated with your company and want to see it succeed.”
Understand the components of a budget
Identify the two ways you made money this year: selling goods, and selling services (in other words, your time). Those make up your income, which is synonymous with sales and revenue, says Janson. “The cost of goods sold represents all items you have purchased for your clients at cost and sold at a markup. Income, minus your cost of goods, gives you your profit number. Below that is your business expenses. This is a very compressed version but your business expenses are basically anything not project related: accounting, overhead, marketing, payroll, travel, your website, and other line items., shares Janson. Subtract that from the profit and you’re left with your net income.
What is a budget, anyway?
As Janson puts it, “A budget is an estimate of income and expenses over a set period of time.” You can use it throughout the year — Janson recommends monthly — to measure your progress and growth. She offers two simple approaches for creating a budget: a top-down budget, and a bottoms-up budget.
Top Down: A top-down budget incorporates your goals for the year to come. For example, a designer who sold about $500,000 of goods in 2023 and would like to reach $750,000 next year will incorporate that aspiration into their budget for the following year. Another designer’s goal might be 10 percent growth in sales. You’ll look at your goals for the following year through the lens of these numbers. Creating a top-down budget is akin to placing “a stake in the ground of what I’m working toward in 2024,” offers Janson.
If you opt to create a top-down budget, here are some questions you should be prepared to answer:
- What has the trajectory of your business been to date, quarter by quarter?
- How much am I going to be marketing next year?
- What are my known project?
- Am I looking for higher end projects?
- Am I increasing my billing rates?
Bottoms-Up Budget: A bottoms-up budget, in the interior design business, focuses on laying out all projects that may spill over into 2024 with future invoicing, involves an analysis of the existing pipeline — as well as a projection of what that pipeline might evolve into in the new year, and a hard look at each area of the business. Consider the following:
- Identify all projects that have started this year but that will have invoices in 2024.
- Peruse all proposals you’ve sent and emails that have gone back and forth. What could the work pipeline look like in 2024? Drop this information in a spreadsheet
- What potential projects may start in Q2, 3 and 4?
- What have your numbers been in those quarters in prior years?
- Are you doing more marketing this year?
- What are your staffing needs, and how will these change? (As Janson points out, you’ll want lower level staff members to be 85 percent billable; if you do not have enough work to support that level, you may need to make some staffing decisions).
- Do you have the right team in place to, as Janson shares, “deliver the business that you want to deliver in 2024?”
How to think about business expenses
While you’ll have to make an estimate here, that’s ok — in some cases, you won’t be able to identify an exact dollar amount. For example, you won’t be able to include a hard number for photography if your photographer isn’t available, or the project isn’t quite camera-ready. Nonetheless, “Go line by line and give it your best estimate based on the facts that you have on the date you prepare your budget.” Consider software fees, payroll (such as raises or new hires), and your own compensation among other expenses like advertising, accounting, insurance and travel.
Being flexible
While Janson is proponent of choosing the top-down or bottoms-up methods, she advocates using both to your business’s advantage. “These two methodologies are an either/or. I wanted to.. keep it attainable,” she shares, nothing that designers might feel that “‘I can pick one of these methods. I can actually execute this in my business life.’” Yet the ideal approach “is really a combination of both methodologies. It’s great to have a goal of getting to $1 million. You did that in your top-down. Well, maybe, you need to do some bottoms-up to see if that number is really possible. The best scenario is when you’re intertwining both of those, doing reasonableness checks on both methods… That’s going to yield the best budget for you to measure your business against for 2024.”
Ready to take the next step and create your own? Tune in to Janson’s full webinar with Studio Designer. You’ll also gain valuable insights on optimizing the use of these forecasts and financial plans to enhance decision-making, spend your resources judiciously, and keep your firm’s projects on track well into the new year… and beyond.
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