Articles & Blogs
Be sure to check out my other article, “Interior Design Accountants & Bookkeepers: How are we different?” Click here.
How healthy is your design business? 3 Financial Indicators to Future-Proof your business
By Katy Olson
(Reprinted with permission, originally featured in Studio Designer)
You can tell a brocade from a damask with your eyes closed. But when it comes to assessing your business’s long-term health, hazardous blind spots abound. It’s a regrettable reality that designers, like countless other creatives, aren’t necessarily gifted with financial foresight. But proactive planning for the ongoing sustainability of your business is achievable, and it needn’t be painful, either.
Caroline Van Wassenhove, CPA, founder of the Chicago-based firm CVW Accounting and Certified Consultant for Studio Designer, works with residential designers nationwide. “Some of the key indicators that we use include forecasting, profitability ratio analysis, and cash flow analysis,” explains Caroline. Read on for her three financial indicators that can help you determine how viable your design business is.
A fact-based financial forecast can help predict where your business is going. Unlike a budget, which is often infused with your hopes for the business, a forecast undertaken by a pro can help you identify what you can expect to unfold based on your prior and current financial state of affairs and anticipated changes in the market.
“While a budget helps our clients outline the direction they believe their business will take, a forecast provides a clearer indication of what has happened and where the business is likely headed. This helps our clients understand their overall sustainability, which allows them to make timely decisions and adjustments as necessary,” says Caroline. Get started by:
- Assemble historical financial data, including sales, expenses, and cash flow patterns.
- Ask: What are your anticipated sales growth targets for the upcoming quarter (or another period)?
- What are your projected expenses, and how will they change in the forecasted period?
- Are there any external factors or industry trends that might impact your business financially?
Ratio analysis is a financial tool used to evaluate a business’s performance; by dividing figures such as sales, expenses, and profits, you can assess both profitability and efficiency. You’ll also get a clear picture of what’s sustainable for the long haul. It’s a particularly helpful tool for interior design businesses, which can often use a disparate array of billing strategies and have an ever-changing number of incoming and outgoing dollars.
“Through ratio analysis, we help identify our clients’ breakeven point and illustrate the impact their revenue structure — i.e., markup percentage, time billing rates, flat fees, etcetera — and operational expenditures have on their profitability,” says Caroline. Some of the common issues among designers, she says, are mistaking “markup for margins,” and lack of awareness of a project’s true costs. Caroline suggests asking:
- What is your organizational structure? This would include team size and responsibilities, types of projects, number of projects, and location of projects, among other factors.
- “What are your overall business goals? (i.e., paying yourself, increasing profitability, scaling up, paying off debt, working less, etcetera)
- What is your revenue structure? (i.e., markup percentage, time billing rates, flat fees, deposit percentage, etcetera).”
Cash Flow Analysis
Forget about your mouth; put your mind where your money is. Understanding where your cash goes is a basic but oft-overlooked metric for gauging the long-term sustainability of your businesses. How much money do you need to keep the doors open and the lights on? Getting a grip on where you spend and how frequently can help your business remain or become sustainable. Some common costs include taxes, salaries, and other operating expenses; Caroline recommends having funds on hand to cover the equivalent of three months’ worth of expenses.
“Since deposits are typically collected [for design businesses] up front, we help our clients identify how much cash should be reserved for projects, sales tax, income tax, and operational expenditures. Depending on the size of the client and other factors — i.e., accounts receivable ratio — we generally recommend an operational cash reserve of three months of operational expenditures and income taxes, a sales tax cash reserve for any sales tax collected but not yet submitted to the state, and a project cash reserve for any cash collected on a project that is due to the trades,” she explains. Some questions to consider when thinking about cash flow:
- What tools or reports — such as expense trackers and accounting software — are you using to oversee cash flow?
- What reports are you reviewing, and how frequently do you analyze them?
Struggling business owners can get a handle on their current state of affairs by first using the above metrics. Then, targeted responses to business challenges can include:
- Managing cash flow.
- Streamlining a firm’s processes.
- Reducing high-interest debt and spending.
- Speeding up collections.
- Increasing profit margins.
- Allocating resources and personnel more effectively.
As Caroline explains, “Our approach is to first get the account up to date and cleaned up if necessary so we can prepare accurate financial reports for analysis. One of the key reports we focus on is the balance sheet. We note areas of concern or risk regarding such things as liquidity, working capital, and ability to pay off debt.”
Financial planning for the long-term health of your business can be intimidating, but honesty is paramount. After all, when it comes to answering challenging financial questions, “There is no ‘good’ or ‘bad’ answer,” says Caroline. “The sooner we identify the main issues and concerns,” she says, “the sooner we can address them.” The key is prioritizing speed and embracing the courage to tackle any looming threats to your business.
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Studio Designer: New Year, New Start
By Caroline Van Wassenhove, CPA
(Originally featured in Studio Designer)
A New Year brings new opportunities for a fresh start. Now is the time to reflect on the last year and put systems in place to set yourself up for a successful year ahead. Below are some best practices I recommend for Studio Designer going into the new year.
1. Create a Budget in Studio Designer
A budget is a tool that can help a business manage its operations over an accounting period. It quantifies a plan for the company to reach a desired goal and provides a target for future performance. It is static and is compared to actual results throughout the accounting period and helps determine variances from expected performance.
You and/or your interior design accountant can set up a budget directly in Studio Designer, under Settings/Budget. A best practice would be to start with the historical data and adjust for any known changes & assumptions for the upcoming period. It will remain static, which will allow you and/or your interior design accountant to run comparative financial statements in Studio Designer throughout the accounting period. The budget will help you measure key performance indicators (KPI’s), which will demonstrate how effectively your company is in achieving its key objectives. It will also allow you make decisions to help achieve your target goals. Examples include: 1) cash flow management (i.e. how long can the company operate in a positive cash flow? when can the company pay its owners/shareholders?), 2) break-even analysis (i.e. at what point is the company profitable?), 3) debt payoff (i.e. what is the cost & impact of carrying debt? how quickly can the company pay off its debt?), 4) personnel (i.e. when is it time to hire more staff?), 5) expansion (i.e. when is it time to rent a larger space?), and 6) increase sales revenue (i.e. when is it time to implement a promotional marketing plan? what are the additional costs & resources needed?).
2. Manage Cash flow
The interior design industry is very capital-intensive, and typically requires up front client & vendor deposits. Without a cashflow management process in place, it can be difficult to understand “how much money is yours”, which then bears the risk of running out of project funds prior to its completion.
A best practice would be to utilize Studio Designer reporting and to implement a cash flow management process. Examples of different strategies for you and/or your interior design accountant to adopt include: 1) the use of multiple bank & credit card accounts to track funds separately for operations, projects, taxes, and profit (i.e. Profit First System), which can help you understand your cash position in real time, 2) the use of cash flow projections as part of your budget process listed above, which can help you determine when the company will receive and spend the money throughout the accounting period, and/or 3) the use of a cash flow statement, which can help illustrate the company’s overall health (your interior design accountant can customize a report in Studio Designer to assist with this process).
3. Understand Sales Tax Nexus and Update Rate Changes in Studio Designer
Sales tax compliance can be a complex but critical component to the operations of an interior design business. It’s important for you and/or your interior design bookkeeper to understand what triggers sales tax nexus to ensure your business maintains compliance. This is true for both in state and out of state projects.
A best practice would be to perform your due diligence on the state sales tax nexus requirements and sales tax laws prior to taking on a new project, as the tax laws and nexus requirements can vary by state. This will help you gain an understanding as to how the sales tax will impact the project, the business, as well all those involved (i.e. clients, vendors). You and/or your interior design bookkeeper can set up defaults & templates directly in Studio Designer (under Settings) to help ensure the project items are then taxed accordingly.
Sales tax rates can also change periodically, so it’s best to be aware of any upcoming tax rate changes prior to them going into effect. If there are changes in the tax rates, you and/or your interior design bookkeeper can make the changes directly in Studio Designer in a few different areas:
• Update the Tax Location rates for any state, local, and/or county sales tax rate changes. This is done in the Tax Locations tab found under Settings.
• Update the Tax on items and activities that are not invoiced. This is done in the Update Tax tab found under the Client Address ID.
Another best practice would be to register with the government agency’s website to receive any notifications related to sales tax rate changes, as the rates can change monthly, quarterly, or annually.
4. Implement a system for new Vendors in Studio Designer
When working with a new trade or vendor, it’s recommended to obtain the following:
• W9 (for 1099 purposes)
• Liability & Worker’s Compensation Certificate of Insurance
• License # (if applicable)
A best practice would be to obtain these documents prior to starting the work with the vendor, as they can be much more difficult to obtain once the work has been completed and the vendor has already been paid in full.
Another best practice would be for you and/or your interior design bookkeeper to enter this information in the Address ID Codes tab directly in Studio Designer. Address reports (which can be customized to include the Insurance Expiration dates) can be run periodically in Studio Designer throughout the year to help determine which certificates of insurance have since expired and need to be renewed. These reports can also highlight any missing W9s for potential 1099 vendors. Doing so will help alleviate the 1099 process as well as the Worker’s Compensation audit process.
5. Customize Reports in Studio Designer
Studio Designer offers several standard reports as well as allows for customized reports as needed.
A best practice would be for you and/or your interior design accountant to determine what reports are needed to help make sound business decisions throughout the year. If a report isn’t offered as a standard report in Studio Designer, you and/or your interior design accountant or bookkeeper can customize a standard report in Studio Designer and filter as needed.
6. Create Efficiencies in Studio Designer
There are a few ways to help save time in Studio Designer. One is to inactivate any Clients and/or Vendors that are no longer in use. All of the historical data will be maintained and will remain available in Studio Designer. This process will reduce the # of results in your dropdown lists, alleviating your search process as well as improving your reporting process.
A second way is for you and/or your interior design bookkeeper to utilize templates in Studio Designer that will auto populate cells when performing certain tasks. An example is to enter a default expense account for your office vendors that are typically coded to the same account each time (i.e. postage).
A third way is to create recurring office payments in the Money Out section of Studio Designer. This process will allow you and/or your interior design bookkeeper to save time by updating the dates and amounts as needed, versus creating the entries each time from scratch. Another best practice would be to use generic office vendor names to cut down on the address ID list (i.e. use “restaurant” vs. the restaurant’s name, and instead enter the name of the restaurant in the office payment description).
7. Know your limits and surround yourself with the right professionals
It takes a village to run a successful business, therefore surrounding yourself with a strong team of professionals can help take your interior design business to the next level.
A best practice would be to work with a team of experts that will alleviate some of the operational responsibilities, allowing you to focus on the design and growth of your business. Examples of such professionals include: attorneys, interior design bookkeepers / interior design accountants (it’s important that they have a strong understanding of Studio Designer), CPAs/Tax Preparers & Tax Planners, Insurance Agents, IT/Website Specialists, Payroll Administrators, and HR Specialists.
Interior Design Accountants & Bookkeepers: How are we different?
by Caroline Van Wassenhove, CPA
Over the years I have had the privilege of working in a variety of industries, but the one that stands out to me is the Interior Design industry. I don’t know if it’s the beautiful furniture, the pops of color, or the one of a kind art pieces, but it continues to impress me. Designing is a form of artistry and it takes a great deal of talent and creativity to transform a person’s living space into their dream home. And while this seems tough enough, designers must do so on time and on budget all while having enough cash to pay their vendors and employees and more importantly themselves.
So how do they do it?
Creativity and project management are unarguable key factors to a designer’s success, but their ability to understand the company’s cash position is just as important. One of the first questions I am typically asked when meeting with a designer is “how much cash is mine?”. They want to know how much cash is needed to pay their vendors and sales tax so that they can see how much is left to pay their operating expenses as well as themselves. Fortunately for designers, these are concerns that can be easily addressed with not only the right software in place, but with the support of the right interior designer accountant as well.
Interior design is a capital-intensive industry and typically requires large up front vendor payments upon order placement. So if, for example, a designer isn’t collecting a sufficient client deposit before hand, or collects a client deposit but then spends it all before the project even begins, there won’t be enough cash left to pay the vendors and they will find themselves in a cash deficit. And not only that, they also have this little thing called sales tax to deal with. In a perfect world, the designer would collect the sales tax as it’s due and make the payment, but rarely does this happen. There is usually a time lag between the collection and payment of sales tax, which can sometimes mislead the designer of their true cash position. Fortunately, there are software applications, like Studio Designer, that provide designers with the tools they need to manage cash flow and their projects all in one system. The key to Studio Designer, however, is to properly utilize the software. The user needs to understand how to track all deposits, project workflows, work in process, inventory, and sales tax, all while managing their cashflow. And as you can imagine, this can become a little overwhelming and time consuming, which is why many designers seek the help of interior designer accountants.
Some might say that bookkeeping and accounting are the same for every company, but interior design bookkeepers and accountants may think otherwise. While the core principles remain constant, interior designer accountants specifically help designers understand the financial impacts their decisions have on their business. As an interior designer accountant myself, I understand project workflows specific to the industry and the impact they have on the company’s cashflow. I understand the implications of shipping cost fluctuations and custom vendor orders, as well as the requirements of sales tax, out of state sales, and inventory tracking. And I’m also aware of the frequent merchandise returns and exchanges that occur during the course of a project and how those returns can impact both the project’s time line and it’s bottom line.
We, as accountants in interior design also help designers by identifying other key areas such as wasteful spending, the company’s break-even point, and the true costs of adding employees, so the designer can decide on things such as hiring more staff, purchasing versus leasing new office equipment, or moving into a bigger office space. We uncover the differences between the highly profitable and less than highly profitable projects to help the designer determine which new projects to take on. We also illustrate the effects of delayed client billing and collecting on the designer’s cash position to help prevent them from fronting any of the project costs. But most of all, we distinguish project cash from operating cash and value the true importance of properly managing cash flow so the designer knows how much cash is theirs!!! So yes, while debits and credits are still the same in bookkeeping and accounting for interior design, a quality interior designer bookkeeper or accountant will go beyond basic bookkeeping and help the designer manage their cash flow so they can make sound business decisions while continuing to grow their business.