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If you’re a design firm leader, it’s time to establish a Profit Plan for the New Year.
My advice is to forget about utilization rates, direct labour multipliers, direct salary expenses and all that other ‘accountant speak.’ Too complicated for mere mortal design types.
Take a conceptual approach to your profit plan instead.
A ‘Strong Practice’ should have a profit plan that describes how it will produce 20-25% in annual operating profits at a minimum.
Let’s generate a conceptual profit plan right here and now for an example firm we’ll call SPD (Strong Practice Design). Let’s say this firm has 4.0 Full Time Equivalent (FTE) personnel. Benchmarks for the design professions suggest a 25% operating profit will require about $150K annually in Net Fee per FTE. That equates to $600K in Net Fee for the coming year ($150K Net Fee/FTE x 4 FTE’s = $600K Net Fee). Let’s say those 4.0 FTE’s include; 1.0 principal, 2.5 staff, plus the equivalent of 0.5 additional support personnel who would be engaged intermittently through the year.
SPD sets its payroll cap at 50% of Net Fee. That’s a good benchmark for a strong firm. That translates to $120K salary for the principal, $60K average for 2.5 staff, and 0.5 support personnel consuming $30K of the payroll. That’s a total payroll of $300K (1.0 @ $120K, 2.5 @ $60K, 0.5 @ $60K) which is equivalent to 50% of the firm’s $600K Net Fee. So far so good.
Now for operating expenses. A strong firm should budget about 25% of Net Fee for operating expenses. Operating Expenses include things like employee benefits, rent, website, subscriptions, license’s, memberships, and the list goes on and on. SPD sets its total operating expenses at $150K (25% of $600K Net Fee).
So, there it is. A conceptual profit plan and it only took us a few minutes. Yes you’ll have to flesh out the details for your own firm but in summary, to achieve 25% Operating Profit in this firm, the profit plan will need to look something like this:
- $150K Net Fee/FTE
- $600K Net Fee (4.0 FTE’s x $150K Net Fee)
- $300K Payroll ($600K Net Fee @ 50%)
- $150K Operating Expenses ($600K Net Fee @ 25%), which will result in
- $150K Operating Profit ($600K Net Fee at 25%)
Now for the hard work. The principal of this firm needs to get out there and procure the right projects (to suit practice goals), for the right price (based on unique expertise and the value delivered to clients), deploy FTE resources effectively, and invest operating expenses wisely.
Use these benchmarks as a guide for your own firm. Net Fee, Payroll, and Operating Expenses are the primary levers to influence your annual operating profit target.
This approach is based on the Strong Practice Scoreboard, as diagrammed and described in my book, Scoreboard Your Practice: 7 Numbers to Understand Your Design Firm’s Financials
Plug your own numbers into the Scoreboard to generate a conceptual profit plan for your practice. Kick the New Year off on the right foot!