Let’s say you started your interior design business to make a profit. Even if it started as a hobby or short-term project, you may outgrow it. We understand how easy it may be to get lost in a job that brings you joy. But if you put off interior design bookkeeping until later and don’t monitor the flow of capital, this can hinder the development of your business. In this article, we will analyze how bookkeeping affects interior design and discuss the rules for working with funds.
The Role of Accounting in The Success of Interior Design Studio
While accounting is an essential part of any business, it is vital if you are in the interior design business. You need to know precisely how much the project will cost, and since you’ll often be getting money upfront, you need to make sure you’re allocating capital correctly while staying within budget. Let’s look at other advantages of interior design accounting:
- Tax deductions: when you record and categorize all your expenditures, you may find transactions that qualify for a lower tax rate or no tax at all.
- Budgeting: excellent interior design bookkeeping allows small businesses to estimate budgets effectively and accurately. You can control, segment, and systematize the inflow and outflow of capital, making it easier to plan future activities.
- Loan processing: according to statistics, 84% of interior design firms in the United States are small businesses with fewer than five employees. Unfortunately, economic institutions are reluctant to provide loans to small businesses due to the significant risk. Accounting will help you fill out financial forms on time so you may borrow money at the best rate.
If you have investors investing in your company, they will likely require the financial report to evaluate your economic situation. Correct bookkeeping allows you to easily create documents for partners, ensuring transparency of capital movements.
How to Do Interior Bookkeeping?
There are 181,265 specialists employed in the interior design field in the US as of 2022, indicating great competition in the sector. To stay afloat in such an environment, you need to monitor your finances and drawing fees constantly. Let’s look at the basic procedures that you will have to deal with when working with capital.
Selecting an accounting system
One of the most critical steps in the interior design business is separating business and personal finances. It is vital to ensure you report your business’s spending and earnings to the Internal Revenue Service (IRS).
If your business is incorporated as a C corporation, failing to separate business expenses from personal expenses may have serious legal consequences.
Many entrepreneurs are faced with the problem of choosing an accounting method using single or double entry; let’s explore each option:
- The double-entry method monitors both debits and credits, not just one of them. Consider this example: your profit was $200, and your expenditures must also be $200 to reach a balance.
- The single-entry method involves recording each transaction once; that is, there is no system of debits and credits.
The double-entry method is more accurate and is ideal when we speak about companies with complex structures. The single-entry system is less reliable than the double-entry system but is preferred by entrepreneurs without accounting experience.
Cash flow management
Depending on the invoicing system you choose, you may find yourself in a position where you are purchasing items on behalf of clients until full payment has been received. Therefore, you must track income, cost of goods sold, and expenses to ensure you have cash. Important points when working with cash flow:
- Keep money in reserve accounts to pay for commodities in advance without risking the firm’s work.
- Sign up for a credit card with a maximum credit limit and a favorable interest rate to use to make customer purchases.
- It is vital to choose a customer settlement system to receive a significant deposit to start shopping.
Product return
Although purchasing control is vital, do not forget to monitor product returns. Because your business credit card is involved in many transactions, you may miss a product return, and you need to be sure you will receive all the credits you were scheduled to receive. It is important to constantly review all operations related to your bank account and payment card to control expected product returns.
Sales tax
Determining the sum of mandatory payments in such a complex area as interior design can be a difficult task. For a large number of purchases and sales, we recommend working with a bookkeeper who not only knows all the intricacies of tax standards but also the directives approved in this field. It means that you may accurately calculate the amount of tax payments, considering the benefits and discounts due.
Time tracking
Since you bill hourly, proper working hours control will ensure you do not lose capital. Although it seems obvious, many interior designers forget to manage their time, especially if it is short. It may not seem like a big deal to remember 25 or 30 minutes of vigorous activity, but without a clear record, you risk working for free a lot of time. The easiest way to control time is to use special applications for computers and smartphones.
Profitability calculation
With many variables, including cost of goods sold, sales tax, time tracking, etc., not every project will be profitable, so it is essential to monitor each type of activity and determine whether it makes money. Based on such data, tactical decisions may be made, e.g., pricing and billing systems can be selected to maximize gains.
The Primary Mistakes in Interior Design Bookkeeping
The worldwide interior design market is expected to be worth $255.4 billion by 2027. Despite the rapid development of the market, interior design remains one of the most challenging types of business to manage since even a small design project requires a large set of documents and proper interior design bookkeeping. Let’s take a look at other challenges entrepreneurs face:
- Lack of a clear record of revenues and spending and their classification: As an entrepreneur, you can count on business deductions, so your goal is to maximize the legitimate expenditures deductible to reduce the amount subject to taxes. However, you can not take advantage of such standards if you do not have paperwork to support your business spending.
- Keeping many accounts uncoordinated for an extended period: popular interior design firms have a constant flow of capital. If you don’t perform regular reconciliation and monitoring, the risk of errors and fraud increases.
Economic specialists at Fuigo say one day, a design company turned to them for help, whose representatives were not involved in approving accounts. It turned out that the company had forgotten to collect more than $20,000 from one of its clients because unpaid invoices had gotten lost, among other transactions. By the time Fuigo noticed the discrepancy, more than six months had passed since the project’s completion, and the designers had not received the money they were owed. As we can see, even a tiny mistake can be costly.
Some Tips on Accounting in the Design Interior Area
Running an interior design business requires the right combination of artistic flair, client communication, and project management. Amid such creativity and customer-centric activities, the economic aspects of business require close attention. Below are some valuable bookkeeping recommendations for interior designers:
- A break from your regular work: as an interior designer, you enjoy your creative work more than bookkeeping, but the latter is an integral part of your business. We recommend marking your calendar and taking time off from your regular activities to get your finances in order.
- Software integration: designers often use specialized software to manage projects, visualize designs, and communicate with clients. Platforms such as Designfiles and Design Manager can easily be synchronized with your bookkeeping software to minimize errors and optimize economic documents.
- Consistent reporting: prepare financial documents accurately to identify trends, threats, and opportunities to provide the firm’s growth. You can use traditional options such as paper and pen, but this is impractical if you plan to produce consistent IRS reporting over several months or years. Use digital tools that allow you to generate statements in a few minutes.
Doing your business’s accounting yourself will save you the capital you would otherwise spend hiring a professional, but it can cost you valuable time and lead to costly mistakes. If you do not have knowledge and skills in the financial industry, it is better to seek help from a professional accountant.
Final Words
BooksTime offers bookkeeping services to interior design businesses; However, we do not offer universal solutions. Instead, we provide a unique approach that considers the challenges and demands facing the interior design industry, as well as the complexity of the projects your firm undertakes.
Our accounting includes everything that is the responsibility of an in-house bookkeeper. Routine accounting tasks include data entry, bank reconciliation, payroll, and reporting, but these are not the only jobs available. We use best financial practices to ensure your firm achieves its economic goals!
