I’ve seen designers make a lot of disastrous financial decisions since we started coaching interior designers in 2008. Here are a few challenges and mindset issues that are truer than I’d like to see:
- Designers are so passionate about design that they’d work for free if they could.
- Designers hate talking about money, collecting money, and dealing with unhappy clients that complain about their bills. They’d rather get a fork in the eye.
- Most designers could be said to have a dysfunctional relationship with money. Maybe they had parents that struggled with their own businesses, they’ve had lean times with a spouse that’s underemployed, or they may have had fights over money with their spouse or partner.
- Many designers have a “hate” relationship with the numbers of their business, and they usually swipe their hands over their heads and say that the numbers figuratively “go over their head.” If you continue believing that you can’t love the numbers (though those numbers pay for your team, family expenses, trips, college, retirement and small luxuries… and sometimes big luxuries), you could go out of business at some point because you aren’t keeping track of what really matters: cash flow and profitability. True business owners vs. hobbyists “get” the numbers and they know what to watch for.
- Profit & Loss (AKA Income Statements) make little sense to many designers. Balance sheets are a complete mystery as well. Unfortunately, not understanding these two statements can lead to your business becoming insolvent… meaning that you’ll have to close your doors and face the shame of failure. We don’t want that for you.
- Cash flow projections are not done by most firms because they are too much work, not clearly understood or the design firm owner may be unaware of how important they are which means that you don’t have a picture of where your business is going… if it is on track or off track from your goals.
Biggest Mistakes That Lead to Failure
- Not reviewing your Income Statement and Balance Sheets on a monthly basis with your bookkeeper.
- Not having your bookkeeper analyze your numbers on a daily, weekly or monthly basis. Your bookkeeper can create a dashboard for you to review and discuss on a regular basis. For our members, we have a sample dashboard in our Coach Accountable files for you.
- Not updating your cash flow regularly and knowing how healthy your pipeline is. For our members, we have a sample dashboard in our Coach Accountable files for you. Few designers do cash flow projections and to me, this is one of the most important tools for you to LOVE!
- Not knowing how much of the cash that’s in the bank is yours… and spending what’s there because your balances are so high.
- Running personal expenses through the business. The IRS frowns on this. Especially if you love to travel, love expensive dinners and clothes. Do not commingle your personal expenses with your business expenses. The IRS has specific red flags that can trigger an audit.
- Not having Errors & Omissions Insurance. One of our clients wrote the wrong number down for a roofing tile selection and it was a $50K mistake. She did have insurance at our recommendation, so she was able to file against it. Could you afford to lose $50K? For most firms, it means that you’d have to have an additional $600,000 of revenue to make up for that mistake!
- Not tracking your hours and using fixed fees. Many years ago, I liked fixed fees and recommended them, and now, I see many designers undercharging by at least 50%. That’s a lot of money that is being left on the table. If you don’t benchmark your time on projects, you should avoid fixed fees.
- Letting wealthy, influential people bully you into low markups because they dangle the carrot of their “friends” they will refer. It’s not worth losing money!
- Not marking up your products enough. Some of you fear asking for what you’re worth and what you need in order to be profitable. This happens way too often.
- Not raising your rates every year. The Cost of Living went up around 8% in 2022. If you don’t raise your rates by at least that much, you’re going to lose money. Your employees still want raises and bonuses of at least 8%, so it’s not an option.
- Drawing out more than 50% of your net profit in any given year is unhealthy for your business. You need reserves for treacherous business cycles that happen every 3 – 10 years, and you need to save for your taxes. Uncle Sam will shut you down if you don’t pay!
- Spending more than your Owner’s Equity (Balance Sheet). I see this more often than I can believe. That means you’re insolvent. And it could be even worse if you’ve spent the client deposits that should be earmarked for paying vendors.
I could go on, but you see the point. It is your duty to yourself, your family and your team to fully understand the numbers. And besides that, you’ll feel more confident once you understand the numbers and start seeing the impact on your life and business.
Pearl Collective’s Financial Sanity Rules
- If you don’t know how to read your P&L and or Balance Sheet well, then consider taking or re-taking our Financial MasterClass.
- Make sure you have a great bookkeeper that understands the industry. Most bookkeepers don’t understand the complexity of what we do. Meet at least monthly to review your financials.
- Make sure you have great bookkeeping software that provides excellent reports. And remember “garbage in, garbage out.” Make sure your staff is trained to enter the information correctly, and that someone checks their work.
- Make sure your company has a cash flow projection that is kept current when new projects come in or when your projects evolve and you know what your product sales and time billing will be.
- Get to know your banker. Meet with your banker at least once or twice a year.
- Meet with your CPA quarterly to review your tax obligations and tax planning strategies. If you don’t have a great CPA or tax consultant and you’re a client of ours, we share our Trust Directory of vetted sources with you in our Coach Accountable files.
- Set up a line of credit when you don’t need it. Borrow small amounts against it and pay it back quickly to build your credit. Be very careful! Do not use the credit line for anything other than temporary cash flow needs. Avoid hitting your limit. You could have your credit line pulled at any moment if the bank looks at your financials and thinks the risk is too high.
- In times like these, you need as much as 6 months to a year of reserves [50 – 100% of your overhead] in the bank. This is outside of what you owe for vendors and balances.
- Know how much you owe for products and services, sales tax, other accounts payable like accounting fees, coaching fees, and attorney fees. Know when it’s due and track this on your cash flow projections. See your specific software package below for helpful information on how to run essential reports and track the items mentioned.
Financial Tracking Software
Thank you to Andrea Hipsher, Director of Finance for Bria Hammel Interiors for providing the information they track in Design Manager. Here is what Andrea tracks:
- Current cash on hand via the bank.
- Credit cards balances via those websites.
- For Design Manager Reports: Accounts Receivable, Accounts Payable, Work in Progress, Client Deposits. Also uncleared checks.
- Averages for upcoming monthly overhead expenses, which you can get from DM, but Andrea uses averages instead.
- She multiplies Open Client Deposits by their average COGS % then reduces that number by the Work In Progress. Also look at open Purchase Orders.
Thank you to Zandy Overcash with Miretta Interiors for providing the information they track in Ivy. Here is what Zandy tracks:
- Run reports on cash received by date.
- Run a Deposits report on completely paid invoices.
- Ivy allows merging those two reports together.
- There is also a project tracker option on Ivy that lets you see what items have been ordered and what items still need to be ordered.
- Ivy has some issues if things are removed from the original quote. It stays in the project tracker until you delete it.
- There is no way to project your future pipeline.
- Project Payments
- Purchase Orders
- Time Billing
- Taxes Liability
- Project Trackers
- Ivy Online Payment Breakdown
- You can search these and run reports with the breakdowns: Paid, Partially Paid, Open, Sent, Closed
- You can also filter through: Proposals, Invoices, Retainers, Purchase Orders
Overall, these reports are very helpful.
Note from Zandy: We used to take payments through Ivy. They can hold your money up to a week. Houzz bought Ivy and they also use Stripe as a processor. Since we wanted to keep our client’s information safe, we decided to only run our payments through Square and QuickBooks.
Thank you Accounting Frontier for providing the information they track in QuickBooks:
- Accounts Payable Aging Summary (or Detail) shows all open bills that need to be paid.
- Amounts owed will only show up in the AP Aging reports once a vendor invoices you though. You can also view PO reports (that are separate numbers of AP Aging) but Accounting Frontier finds that this usually isn’t very accurate because of sync issues (with an Ivy for instance) or people not keeping it updated manually.
- Orders by Vendor
- This shows all open vendor balances for any item with a PO number
- Pending Payments
- This shows office payments that are ‘pending’. This can be helpful depending on how it is used. Many designers save recurring transactions here (like a payroll journal or subscriptions) so it isn’t very helpful most of the time.
- Another issue people have with non-project expenses is that there are no accounts payable functions for operating expenses. For instance, accounting or coaching bills would not show as outstanding anywhere because they aren’t run through as an item. If someone is getting behind on operating expense payments, this could be a blind spot and there isn’t a great way to solve this. Many of these operating expense payments are paid on a credit card so that can help, but it is possible for someone to fall behind on contractor payments because there’s not an easy way to track it.
- Cash Analysis
- Cash Analysis isn’t under reports. To see it, go to Accounting -> Balance -> Cash Analysis (blue button on right side of page)
- This takes the current cash balance (which would only include recorded transactions. Therefore, the numbers could be off if your books aren’t up to date.) and then backs out deposits, sales tax, credit cards, accounts payable, and adds back accounts receivable and vendor deposits to get a long-term cash balance. This should be a fairly accurate picture of your long-term cash.
Learn more about Studio Designer.
I’ve had many tearful conversations after reviewing financials with our clients. That’s why we do a 3-Year Financial Model during our 3-Day VIP Experience and we review every single line in detail so that the owners can think strategically and make good decisions about how to charge, how to control costs and how to build wealth.
If you’re not focused on being profitable, you likely won’t be profitable. This may be a fun business, but it is a heck of a lot more fun when you make a great income doing it. We’ve had clients turn their businesses around from losses or modest profit to healthy six-figure net profits. A few rockstars make over $1M in net profit a year after their salaries. You can make a great living and you can achieve financial freedom. All you need to do is put in the effort to make friends with your financials!