As an interior designer, you prefer sketching conceptual renderings for your new clients or meeting the contractor to check a project’s progress – over reviewing your financial reports.
However, to continue doing business, to grow your business, and to keep doing what you love – you must monitor your company’s financial performance. This performance is shown on your financial reports. By reviewing these reports on a regular basis you can analyze your cash flow and profitability, and make sound business decisions.
I recommend scheduling a time to do this every month. This ensures you have a set time to work on your business – and not just in it.
Let’s start by identifying the 3 key documents you’ll review and why they’re important.
Balance Sheet – The balance sheet shows the financial position of your business at a given point in time reflected by your assets, liabilities, and equity. Your assets are the things you OWN, your liabilities are the thing you OWE, and your equity is the net difference between the two. These values are cumulative from the inception of your business. By understanding the makeup of your assets and liabilities, you can –
- plan on what to expect in the future
- consider what should be changed now to position you for the future
- highlight resources that could support company growth
Income Statement – The income statement (also known as the profit and loss statement) is the summary of revenue and expenses for a specified period. These values reset at the beginning of each calendar or fiscal year. The income statement can provide you with insight about –
- your operations
- how to better manage your finances
- areas needing improvement
- how your business is trending as compared to your competitors
Cash Flow Statement – The cash flow statement is your summary of the inflows and outflows of cash or cash equivalents. This summary is broken down between operating, investing, and financing. It helps you understand how your cash has moved throughout the business so that you can –
- meet your obligations
- cover your debts
- make decisions regarding short- and long-term plans for your company
Now as I mentioned before, you should be looking at your financials monthly. But there may also be un-scheduled times where you need to gain some insight from your numbers. Here are five examples of such situations.
- Your gross profit margin is not as high as you expected. This could be the result of an unanticipated expense that’s impacting your direct costs. Take a look at your spend to identify what’s causing the variation and adjust accordingly.
- Your labor and subcontractor percentages to income are steadily increasing and seem higher than projected. If they’re paid hourly, review the hours worked to determine if they’re meeting your productivity expectations. Go through all of your open projects to see if there were any unanticipated design costs due to the state or age of a property.
- You need to make a large capital expenditure. While you may plan for a large expenditure during the year, there are times when you need to make that purchase sooner. Or maybe you didn’t plan for it and therefore it’s a new expense. Based on the amount of the purchase, determine whether you can pay for it in full or if the amount needs to be financed. Then assess the impact that purchase will have on your future cash flow.
- Ordering merchandise earlier than originally planned. This can be due to manufacturer and shipping delays that may cause you to place orders sooner than originally planned. This can impact your cash flow in a major way as the vendor will want at least a 50% deposit to start the order. Assess the impact on your cash flow and the project status and whether you can request a sooner payment from the client.
- Money is feeling tighter than normal due to late customer payments. This will affect how you pay your vendors and team. A delayed payment can be caused by the client reviewing an invoice or by a bank funding the project and awaiting pending inspections. This will require not only a look at interim financials but also a look at your individual jobs. Assess whether a progress bill can be issued for other projects as well as which vendor payments can be pushed back or delayed.
In order to grow your numbers, you have to know your numbers. If you’re ready to move the needle in your business, let’s have a conversation about financial strategy. Schedule a Get to Know call here.