As with many businesses, demand for interior design services tends to ebb and flow. Some of this fluctuation is seasonal; for example, clients wanting their homes to look great for the holidays. Some of it may be due to short-term design trends, some to longer-term demographic trends and economic cycles. In some years, demand may go up and down from quarter to quarter. At other periods, demand may peak for several years in a row and then slowly begin to slow down for a year or two. While client demand can fluctuate, other aspects of the business remain constant. You still have to pay your operating costs, salaries and taxes, to name a few. Therefore it is critical for the long-term success of your business that you maintain a steady flow of cash at all times, regardless of the level of demand for your services. Poor cash flow management is one of the main reasons that many small businesses fail within their first few years.
Know your numbers
Effective cash management begins with having a comprehensive understanding of your business’s financial workings. It’s not enough just to check now and then on the balance in your bank account. You need to know how frequently you have revenues coming into the business, how quickly that revenue goes out to pay expenses, how much is left (net) at the end of the month and at the end of the quarter, and how much you have in reserve to cover expenses during periods of low demand.
Keeping on top of your billing practices is crucial. How often do you invoice? What is the average lag time between when you invoice and when you receive payment? What percentage of invoices are paid late, paid partially or disputed, or not paid at all? How much profit have you made at the end of the day (that’s money in the bank)? It’s important that you understand all of these ways in which money flows.
Forecasted is forewarned
Sticking to a budget can help you to control expenditures. But even a well-made budget is only a best estimate of how revenues will cover expenses. You want to regularly compare your spending against what you budgeted at the beginning of a given period. In particular, you want to track how much is owed versus how much net revenue you are bringing in. This is something your bookkeeper or accountant can help you with. There also are software products and apps you can use to track your cash and performance against budget.
You can’t always anticipate a sudden drop in demand, but in general you can reasonably calculate for each quarter how much money will come into the business and how much will go out. How many projects do you have in the pipeline for the next three months? At what stage will you invoice for work done or purchases made for those projects? How soon can you expect to receive payment on those invoices? Are there outstanding invoices from the previous quarter? Do you foresee any external factors that could result in project delays or cancellations? Do you expect project inquiries to increase or decrease? Figuring in a certain percentage for lost or uncollected revenue, as well as the total of months expenses for the quarter, will you be in the black or the red at the end of three months? If in the red, do you have sufficient reserves to cover the difference? Plot on a timeline where these expenses and revenues will flow in or out of your business, and make sure there aren’t any disasters on the horizon.
Cash flow strategies
If you frequently find that your cash holdings are tight or insufficient, consider one or more of the following strategies to improve your cash flow.
- Market and network more to maintain a constant flow of projects in the pipeline. Don’t wait until you’ve finished what you have on the boards now before seeking new business.
- Consider adjusting your fees. Chances are you are underestimating your value. Reexamine your value proposition and your client pool to get paid what you truly are worth.
- Diversify your revenue streams. Are there other services you can offer, such as consulting or online design, to generate additional revenues? Are there other lines of business, such as product design, construction or real estate you could pursue to support your design firm?
- Change your billing practices. Invoice faster and collect faster. Consider offering clients incentives to pay sooner. Encourage clients to use mobile payments to get deposits credited sooner.
- Pay off debt faster. Look for ways to reduce interest and fees paid on loans and credit cards.
- Reduce spending and lower costs. Eliminate non-essential expenditures. Try to renegotiate rent or lease payments. Delay investing in new equipment or hiring staff until your cash flow situation stabilizes.
- Make your money work for you. Move cash you don’t need right away from a checking account to a savings account or an investment account where it can earn interest or dividends.
- Apply for a line of credit. Unlike a bank loan, you only tap into your line of credit for as much as you need when you need it. That reduces your liability and makes it easier to repay the debt more quickly. Rates for small businesses are often better than those charged by credit card companies, helping you to save on interest and fees.
Managing cash flow is not the most exciting aspect of running an interior design business. But it is essential to keep that business in good shape so you can spend more time on the parts that you love. Once you get a system in place, it will take less time than you might think!