Last week, we began our two-part series on financial planning for interior designers by discussing the importance of setting financial goals and establishing a schedule for key financial tasks. Today, we'll delve deeper into essential financial practices, including budgeting basics, bookkeeping essentials, and understanding financial statements, to empower you in navigating the financial landscape of your interior design business with confidence and proficiency. With tax season upon us, there's no better time to have a more complete understanding of your financial situation.
Financial planning and forecasting are indispensable aspects of success for both new and seasoned interior designers. Whether you're just starting out or have been in the industry for years, having a solid grasp of your finances is crucial for driving business growth, making informed decisions, and ensuring long-term sustainability. Financial planning allows you to anticipate potential challenges, capitalize on opportunities, and strategically allocate resources to achieve your business objectives. By forecasting future financial performance, you can proactively identify areas for improvement, mitigate risks, and adapt your strategies to changing market conditions. Ultimately, incorporating financial planning and forecasting into your business practices empowers you to chart a course towards greater financial stability, profitability, and success in the unpredictable world of interior design.
Design: Anderson Wier Studio | Photography: Margaret Austin
Budgeting and Bookkeeping Basics
Budgeting serves as the foundation of effective financial management, providing a roadmap for allocating resources and guiding decision-making processes within your business. It's best to start by outlining your anticipated income and expenses for the upcoming fiscal period, taking into account both fixed and variable costs associated with running your interior design studio. Then you can revisit and adjust your budget as needed to reflect changes in your business operations and to make sure that it is in alignment with your overarching financial goals.
A solid bookkeeping system and/or accounting software are crucial to providing you with confidence in your business' financial operations. Customizing your chart of accounts to fit your business operations will help put your revenue, expenses, assets, and liabilities into categories that make sense, enabling you to read your financial statements with greater ease and confidence.
You can work with your bookkeeper or CPA (Certified Public Accountant) to customize a chart of accounts. Questions to ask yourself can include:
What are your main revenue streams? For most interior designers these tend to be Sales of Product and Design Services (billable time).
What are your main expenses? Cost of goods sold are the items you purchase with the intention of selling to your client/end user. These are also subcontractors doing work on your client’s space. General expenses can include recurring software/subscriptions, memberships, photography, social media, payroll (wages and payroll taxes), contractors, client gifts, travel, rent, computers or other office equipment.
Do you have any liabilities such as a business car loan or a small business loan?
Design: Amber Interiors | Photography: Shade Degges
Financial Statement Dictionary
Financial statements serve as vital tools for assessing the financial performance and position of your interior design business, providing valuable insights into revenue generation, expense management, and overall profitability. That being said, financial statements have a language of their own, so we're breaking down the 3 key financial statements.
Profit and Loss Statement (P&L)
Also known as an income statement, the P&L statement summarizes your business's revenues, expenses, and net income or loss over a specified period, typically on a monthly, quarterly, or annual basis.
Gross Profit Margin is the (Gross Profit / Total Income). This measures the amount of sales generated for a period against your cost of goods/labor as a percentage. If your Gross profit margin is lower than expected, you can look for ways to decrease expenses.
Net Profit Margin is the (Net Income / Total Income). This formula takes into account all your company’s expenses and shows how well you are using your company’s resources to generate income. A low profit margin could indicate you have a lot of overhead and you may not be pricing your services to cover these costs.
Product Margin is the (Sale of Product Income-Cost of Goods Sold)/Sale of Product Income. Typical profit margins for interior designers selling products can range from 20% to 50%, depending on the industry standards and the type of products sold.
Labor Margin is the (Design Hours Income - Cost of Labor (wages))/ Design Hours Income. Typical labor margins for interior designers billing hourly or fixed fee over a period of time range from 50-70%. Moreover, the labor profit should be flexible enough to accommodate unexpected expenses, such as revisions to the design, additional meetings with clients, or unforeseen complications during the construction phase.
Balance Sheet
The balance sheet provides a snapshot of your business's financial position at a specific point in time, presenting assets, liabilities, and equity. It offers valuable insights into liquidity, solvency, and overall financial stability.
If you are tracking your open bills/purchase orders, these liabilities will show up on the balance sheet as accounts payable so you know this is money allocated to someone already, not to you.
Your sales tax payable will also show up here, along with your bank balances (assets) and credit card balances (liabilities)
If you take owners draws (sole proprietors and LLCs), these will show up in the equity section (wages paid will be shown on your income statement)
Other liabilities like Loans Payable will show on your balance sheet liabilities section.
Cash Flow Statement
The cash flow statement tracks the inflow and outflow of cash within your business, highlighting sources and uses of cash from operating, investing, and financing activities. It facilitates monitoring cash flow trends, identifying potential cash shortages or surpluses, and optimizing cash management strategies.
Strategies for Improving Cash Flow
Keep an operating account with 3x monthly operating expenses
Create an accurate forecast for the next quarter & year
Common Cash Flow Issues for Interior Designers
Irregular income due to fluctuating projects, delayed payments, irregular invoice payment intervals
Seasonal demand can result in higher income in certain period
Overspending on materials and supplies - always collect on your invoices before purchasing product
Unforeseen circumstances such as repairs, legal fees
Design: Ali Henrie Design | Photography: Malissa Mabey
Mastering the fundamentals of financial planning is essential for achieving long-term success and sustainability as an interior designer. By implementing sound financial practices and leveraging valuable insights from financial reporting and professionals, you can navigate the complexities of the financial landscape with confidence, positioning your business for continued growth and prosperity. Brittney Vier, a virtual bookkeeper for designers, breaks down everything you need to know about your finances as an interior designer in this bonus episode from The Interior Collective Podcast.